i^WMJI 


ELEMENTARY 
ECONOMICS 

CARLTON 


ELEMENTARY  ECONOMICS 


THE  MACMILLAN  COMPANY 

NEW  YORK    •    BOSTON  •    CHICAGO  •    DALLAS 
ATLANTA   •    SAN   FRANCISCO 

MACMILLAN  &  CO.,  Limited 

LONDON  •  BOMBAY  •  CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd. 

TORONTO 


ELEMENTARY  ECONOMICS 


AN  INTRODUCTION  TO  THE  STUDY  OF 
ECONOMICS  AND  SOCIOLOGY 


BY 

FRANK   TRACY   CARLTON,   Ph.D. 

PROFESSOR    OF   ECONOMICS   IN    DE    PAUW    UNIVERSITY 

FORMERLY    PROFESSOR    OF    ECONOMICS    AND 

SOCIOLOGY   IN   ALBION    COLLEGE 


THE   MACMILLAN   COMPANY 

1920 

All  rights  reserved 


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c"^ 


,C.O-^ 


Econ.  Dept.  Econ.  iA.  Main  Library 

Copyright,  1920, 
By  the  MACMILLAN  COMPANY. 


Set  up  and  electrotyped.     Published  January,  1920. 


NotiDonlJ  ^tess 

3.  S.  Gushing  Co.  — Berwick  &  Smith  Co, 

Norwood,  Mass.,  U.S.A. 


CONTENTS 

PAOB 

Introduction 1 

The  changing  world  in  which  we  live  —  Business  activity  — 
What  is  economics  ?  —  Topics  for  discussion. 


PART  I 
OUTLINE  OF  INDUSTRIAL  AND  SOCIAL  EVOLUTION 

CHAPTER 

1.  Getting  a  Living  under  Various  Conditions         .        .        1 

Industrial  stages  —  The  hunting  and  fishing  stage  —  The 
pastoral  stage  —  The  agricultural  stage  —  The  small  tool  age 
—  The  factory  era  —  Topics  for  discussion. 

2.  Industrial  Progress  in  the  United  States    ...      16 

Colonial  and  pioneer  America  —  The  nineteenth  century  — 
Growth  of  the  business  unit  —  The  evolution  of  the  shoemak- 
ing  industry  in  the  United  States  —  The  twentieth  century  — 
The  complexity  of  modern  life  —  Topics  for  discussion. 


PART  II 
FUNDAMENTAL  ECONOMIC  CONCEPTS 

3.  The  Production  of  Commodities 27 

Why  business  is  carried  on  —  Exchange  —  Classification  of 
industries  —  Essentials  of  big  business  —  Topics  for  discus- 
sion. 

4.  Wants  and  Value 35 

Why  do  people  want  commodities  ?  —  Utility  —  Why  are 
land  and  capital  desired  ?  —  Value  —  Price  —  Topics  for  dis- 
cussion. 


416608 


VI  CONTENTS 

CHAPTER  p^CB 

5.  Direction  of  the  World's  Workers        ....      43 

The  national  income  equals  the  production  of  the  nation  — 
The  consumer  and  business  enterprise  —  Savings  —  Luxury 
and  waste  —  The  rights  and  duties  of  the  consumer  —  Topics 
for  discussion. 

6.  Shares  in  the  National  Income        ....  53 

Wages  —  Individual  bargaining  —  Collective  bargaining  — 
Arbitration  —  Minimum  wage  —  Interest  —  Rent  —  Dimin- 
ishing returns  —  Rent  and  land  value  —  Profits  —Sugges- 
tions and  topics  for  discussion. 

7.  Wealth  and  Income 69 

Distribution  of  wealth  in  the  United  States  —  Income  — 
Family  budgets  —  Topics  for  discussion. 

8.  Growth  and  Distribution  of  Population       ...      74 

The  increase  in  population  —  Growth  of  cities  —  Popula- 
tion and  resources  —  The  immigrant  in  the  United  States  — 
The  Negro  problem  —  Topics  for  discussion. 

9.  Competition  and  Monopoly 81 

Regulated  competition  —  Classification  of  monopolies  — 
Examples  of  natural  monopolies  —  Topics  for  discussion. 


PART  III 
ECONOMIC  PROBLEMS 

10.  Money  and  Banking 91 

Money  is  a  measure  of  purchasing  power  —  Metallic 
money  —  Coinage  —  Paper  money  —  Credit  —  Banks  —  The 
clearing  house  —  Banks  in  the  United  States  —  Paper  money 
issued  by  banks  —  Suggestions  to  teachers. 

11.  Forms  of  Business  Organization 101 

The  nature  of  business  —  The  single  enterpriser  —  The 
partnership  —  The  corporation  —  Bonds  —  The  trust  —  Co- 
operation —  Governmental  enterprise. 


CONTENTS  VU 

CHAPTER  PAOB 

12.  Railway  Transportation 109 

The  importance  of  the  railway  —  Growth  of  the  American 
railway  —  The  railway  is  a  monopolistic  business  —  Regula- 
tion or  public  ownership. 

13.  Municipal  Monopolies 119 

General  principles  —  Water  —  Gas,  electricity  and  trans- 
portation —  Other  municipal  industries  —  Topics  for  dis- 
cussion. 

14.  The  Labor  Force        .        . 126 

Labor  in  modern  industry  —  Immigration —  Restriction  of 
immigration  —  Routine  work  —  The  migratory  worker. 

15.  Labor  Organizations 133 

Why  is  labor  organized  ?  —  Relation  of  employer  to  em- 
ployee —  Knights  of  Labor  —  The  American  Federation  of 
Labor  —  The  structure  of  a  labor  organization  —  The  In- 
dustrial Workers  of  the  World  —  Employers'  associations  — 
Topics  for  discussion. 

16.  Labor  Legislation 142 

The  labor  contract  —  Attitude  of  the  courts  —  The  ad- 
vantage of  a  short  working  day  —  Legislation  in  regard  to 
child  and  woman  labor  —  Topics  for  discussion. 

17.  Methods  of  Paying  for  Labor 150 

Time  wage  —  Piece  wage  —  Premium  plans  and  scientific 
management  —  Profit  sharing  —  Cooperation  —  Topics  for 
discussion. 

18.  Agricultural  Economics 158 

Farming  as  a  business  —  Peculiarities  of  the  business  of 
farming  —  Agricultural  statistics  —  Farm  tenancy  —  Farm 
labor  —  Rural  social  problems. 

19.  Insurance 165 

What  is  insurance  ?  —  Social  insurance  —  Workingmen's 
compensation  —  Health  insurance  —  Unemployment  insur- 
ance —  Provisions  for  enlisted  men  and  their  families  — 
Topics  for  discussion. 


viii  CONTENTS 

CHAPTER  PAGE 

20.  Marketing 174 

Inefficient  methods  —  Proposals  for  betterment  —  Adver- 
tising —  Topics  for  discussion. 

21.  Public  Expenditures  and  Public  Debts  .        .        .    180 

The  functions  of  government  —  Expenditures  of  different 
governmental  units  —  Analysis  of  expenditures  —  Public 
debts  —  Topics  for  discussion. 

22.  Taxation 187 

Governmental  income  —  The  budget  system  —  Definition 

—  Tariffs  —  Internal  revenue  —  The  federal  income  tax  — 
State  and  local  taxation  —  The  corporation  and  license  taxes 

—  The  general  property  tax  and  special  assessments  —  Jus- 
tice in  taxation  —  Topics  for  discussion. 

23.  Industrial  Unrest 196 

Causes  of  industrial  unrest  —  Distribution  of  wealth  — 
Unemployment  —  The  denial  of  justice  —  Denial  of  the 
right  to  join  labor  organizations. 

24.  Social  and  Industrial  Betterment 202 

Plans  for  betterment  —  The  single  tax  —  Socialism  — 
National  guilds  —  Anarchism  and  syndicalism  —  The  pro- 
gram of  the  sociologists. 


ELEMENTARY  ECONOMICS 


ELEMENTARY  ECONOMICS 


INTRODUCTION 

'  The  Changing  World  in  Which  We  Live.  The  world  in 
which  we  Hve  is  an  ever  changing,  restless  world ;  it  is  not 
static  or  at  a  standstill.  Institutions,  laws  and  ways  of 
getting  a  living  are  different  to-day  from  those  prevailing 
when  George  Washington  was  President;  and  before  the 
year  2000  is  ushered  in  many  further  changes  will  occur. 
There  is  progress,  or  at  least  change,  as  the  years  go  by  in 
government,  in  moral  ideals  and  in  methods  employed  in 
industry.  "  Constant  change  is  the  law  of  life,  in  institu- 
tions as  well  as  in  animals." 

It  is  very  difficult  for  us  who  live  in  the  present  age  of 
variety,  of  luxury  and  of  power  over  nature,  to  picture  the 
long,  hard  journey  through  which  mankind  has  passed  in 
order  to  reach  the  present  stage  of  civilization.  The  primi- 
tive man  was  but  little  above  the  animal ;  he  lived  in  caves 
and  hunted  and  fought  as  an  animal.  In  the  early  ages 
of  semi-civilization,  men  cooked  with  hot  stones  placed  in 
wooden  vessels.  These  vessels  were  coated  with  clay  to 
prevent  burning.  Finally,  clay  vessels  were  used,  and  pot- 
tery came  into  being.  Sugar  was  unknown  to  the  Romans, 
and  Washington's  residence  was  without  stoves.  "  The 
people  in  the  main  part  of  the  world  never  had  any  potatoes, 
corn,  tomatoes,  peanuts,  nor  turkeys  until  after  America 
was  discovered.''  The  writer's  father  never  saw  or  heard 
B  1 


2  c',c        .ELE:MilMTiA.RY   ECONOMICS 

of  hitihy  tlklfigs'  with  niiii^h  we,  only  a  little  more  than  a 
generation  later,  are  familiar,  —  the  automobile,  wireless 
telegraphy,  the  submarine,  the  fireless  cooker,  or  a  building 
made  of  concrete.  We  of  to-day  live  in  a  new,  wonderful, 
and  constantly  shifting  world,  —  a  superb  moving  picture. 

A  half  century  has  greatly  modified  the  food  supply  of 
the  people.  The  monotonous,  badly  cooked  diet  of  a  few 
decades  ago  has  been  replaced  in  many  homes  by  a  well- 
balanced  variety.  ''  Cheap  transportation  has  brought 
the  products  of  the  tropics  to  our  doors,  and  refrigeration 
and  canning  have  annihilated  time  as  far  as  the  food  supply 
is  now  concerned."  The  importance  of  this  change  in  con- 
serving the  health  of  the  indoor  worker  can  scarcely  be 
overemphasized.  The  lighting,  heating,  and  sanitation  of 
dwelling  places  and  workshops  have  been  revolutionized 
since  the  day  Fort  Sumter  was  fired  upon. 

Business  Activity.  Human  beings  are  creatures  of  wants 
or  desires;  and  the  wants  of  the  modern  man  and  woman 
are  a  multitude  compared  with  those  of  the  primitive  man 
or  even  of  the  pioneer.  These  varied  wants  or  desires  of 
the  men  and  women  of  to-day  are  satisfied  through  all  sorts 
of  activity,  but  chiefly  as  the  result  of  the  activity  called 
work  or  business.  In  order  to  satisfy  wants  and  to  obtain 
desired  articles  and  services,  men  combine  and  cooperate 
and  struggle  and  compete  with  one  another  in  the  business 
and  the  social  world  Likewise,  groups  of  individuals  and 
nations  do  the  same  thing. 

Robinson  Crusoe  did  not  have  a  complicated  method  of 
satisfying  his  wants;  and  the  pioneer  of  America  also  sup- 
plied his  wants  in  a  very  simple  fashion.  But  to-day  in 
modern  complex  society,  the  wants  and  desires  of  the  average 
person  are  many,  and  the  satisfaction  of  those  wants  involves 


INTRODUCTION  3 

many  intricate  problems.  Many  cooperating  individuals, 
not  one  or  a  small  group,  are  concerned.  Economics  is, 
therefore,  a  social  science.  In  the  social  sciences  —  eco- 
nomics, sociology  and  political  science  —  the  changes  in 
institutions,  laws,  and  ways  of  getting  a  living,  and  their 
effects  upon  men  in  their  relations  to  other  men,  are  studied. 
In  economics,  the  wants  and  the  satisfaction  of  the  wants  of 
men  and  women  are  investigated.  Two  of  the  fundamental 
questions  in  economics  are :  why  are  certain  commodities 
or  services  wanted  ?  and  how  are  these  wants  satisfied  ? 

It  is  the  intricate  mechanism  used  to  supply  the  wants 
of  men  and  women,  you  and  me  and  all  of  us,  the  complex 
mechanism  of  business,  that  we  are  to  study.  How  did  the 
machinery  of  the  business  world  come  into  being?  Why  is 
it  utilized?  What  keeps  it  going?  These  are  some  of  the 
underlying  problems  in  economics.  Wherever  an  oppor- 
tunity presents  itself  to  provide  an  income  by  supplying 
the  wants  of  people,  a  worker,  —  a  business  man  —  appears 
to  do  the  necessary  service  —  for  compensation,  of  course, 
which  in  turn  enables  him  to  buy  the  products  of  others. 
We  are  also  able  to  enjoy  many  things  in  common.  Nearly 
everybody  uses  the  railway.  The  city  waterworks  and 
electric  lighting  plants  are  for  collective  use.  Playgrounds, 
schools,  and  streets  are  utilized  by  many  individuals,  and 
as  a  rule  are  owned  by  the  community. 

What  Is  Economics?  In  economics  are  studied  the 
methods  by  means  of  which  men  get  a  living  or  obtain  the 
necessities,  comforts  and  luxuries  of  life.  Economics  is  a 
study  of  the  interrelationship  of  men  and  women  in  the 
business  world  or  in  the  process  of  earning  a  living  or  of 
satisfying  their  wants  and  desires.  Economics  is  not  a 
science  in  which  the  problems  discussed  can  be  proved  mathe- 


4  ELEMENTARY   ECONOMICS 

matically;  and  it  fairly  bristles  with  controverted  points. 
In  the  study  of  the  social  sciences,  the  student  must  always 
try  to  look  on  both  sides  of  a  question.  He  should  endeavor 
to  draw  his  conclusions  independently  instead  of  accepting 
blindly  and  without  question  the  statements  of  the  textbook 
or  of  the  teacher.  Mere  memorizing  is  of  little  importance. 
In  many  other  subjects  —  language,  ancient  history, 
chemistry,  mathematics  —  the  student  begins  the  study  of 
the  subject  with  few  or  no  preconceived  notions.  All  is 
new,  and  the  material  does  not  touch  everyday  affairs.  In 
economics,  the  familiar  matters  of  industrial  and  social  life 
are  considered.  We  all  have  our  preconceptions  and  our 
class  or  interest  bias.  Although  a  person  without  training 
in  engineering  would  hesitate  to  offer  solutions  for  difficult 
engineering  problems,  and  persons  without  legal  training 
rarely  attempt  to  solve  legal  difficulties,  nearly  everybody 
feels  competent  to  discuss  economic  problems  and  to  offer 
definite  solutions.  The  student  in  economics  ought  to  be 
cautioned  against  prejudice  and  against  conclusions  based 
upon  inadequate  analysis.  Economics  is  an  interesting  and 
practical  subject,  and  it  is  concerned  with  matters  which 
touch  everyday  life,  —  questions  of  prices  and  markets, 
taxation,  banking,  tariff,  wages,  rent,  transportation,  and 
ownership  of  property. 

TOPICS   FOR   DISCUSSION 

1.  Contrast  the  life  of  the  primitive  man  with  that  of  your 
neighbor. 

2.  Name  six  recent  important  inventions. 

3.  Do  you  know  of  any  recent  changes  in  the  diet  of  the  American 
people  ? 

4.  What  different  kinds  of  business  are  followed  by  the  men  and 
women  of  your  town  or  city? 

5.  Why  is  economics  a  social  science  ? 


PART  I 

OUTLINE  OF  INDUSTRIAL  AND  SOCIAL 
EVOLUTION 


CHAPTER  I 
GETTING  A  LIVING  UNDER  VARIOUS   CONDITIONS 

Industrial  Stages.  The  characteristics  of  individuals  and 
of  groups  of  persons  are  in  no  small  measure  the  resultant  of 
the  occupation  they  follow,  of  the  manner  in  which  they  get 
a  living.  The  roving,  hunting,  and  fighting  tribesman  of 
the  primitive  world  is  very  different  from  the  land-owning, 
land-cultivating,  stay-at-home  farmer  of  to-day.  The  hardy 
and  resourceful  pioneer  who  pushed  into  the  American  wilder- 
ness a  few  decades  ago  possessed  traits  of  character  which 
are  not  fostered  through  contact  with  the  routine  of  a  big 
manufacturing  plant.  Each  one  of  us  is  in  no  small  measure 
the  product  of  the  training  he  has  received  and  the  environ- 
ment in  which  he  has  lived.  The  occupation  of  the  adult 
has  stamped  him  with  certain  traits  and  peculiarities  which 
are  not  easily  erased  or  canceled.  The  different  eras  or 
stages  in  industrial  life,  or  in  the  predominant  methods  of 
getting  a  living  for  the  members  of  the  human  race,  may  be 
classified  in  five  broad  divisions :  hunting  and  fishing, 
pastoral  activities,  agriculture,  small-tool  work,  and  ma- 
chine or  factory  employment.  The  fundamental  basis  for 
this  arrangement  of  stages  in  industrial  life  is  the  growing 
power  of  men  over  natural  forces  and  resources.  These 
stages  also  mark  differences  in  the  characteristics,  habits, 
and  ideals  of  men  and  women;  the  methods  by  means 
of  which  people  associate  with  one  another  are  also  very 
different  in  the  various  stages. 

7 


8  ELEMENTARY   ECONOMICS 

The  Hunting  and  Fishing  Stage.  The  most  crude  and 
primitive  form  of  getting  a  living  was  through  the  gathering 
of  berries  and  nuts,  and  by  hunting  and  fishing.  The  primi- 
tive hunting  and  fishing  tribes  made  no  effort  to  keep  up  the 
supply  of  nuts,  berries,  game,  or  fish.  The  savage  took  what 
the  field,  forest,  and  stream  offered.  In  times  of  plenty 
he  gorged  himself;  in  times  of  scarcity  he  starved.  Agri- 
culture, mining,  and  manufacture  —  business  —  were  things 
of  the  future.  The  density  of  population  was  very  low,  and 
large  areas  were  necessary  to  support  the  hunter  and  the 
nut  gatherer.  The  man  of  the  hunting  and  fishing  stage 
was  a  rover  because  it  was  necessary  to  find  a  food  supply. 
The  primitive  man  could  not  make  the  food  supply  come 
to  him.  Consequently,  the  savage  had  no  fixed  habita- 
tion ;    he  was  constantly  searching  for  a  food  supply. 

Any  encroachment  upon  the  hunting  grounds  by  another 
tribe  meant  reduction  of  food  supply.  It  signified  more 
mouths  to  feed  from  the  same  source  of  supply;  it  spelled 
scarcity.  Since  the  savage  could  not  increase  the  food 
supply,  the  only  hope  of  avoiding  starvation  lay  in  driving 
out  or  exterminating  the  intruder,  or  in  finding  new  hunting 
grounds.  The  latter  alternative  would  probably  lead  to 
struggle  with  still  another  tribe.  The  savage  hunter  be- 
came of  necessity  a  ruthless  enemy  of  all  intruders.  All 
strangers  were  enemies;  they  were  a  menace  to  the  food 
supply  and,  hence,  to  the  welfare  and  even  to  the  life  of  all 
members  of  his  tribe.  Food  —  the  basic  necessity  of  man- 
kind —  was  scarce.  Other  tribes,  other  hunters  and  fishers, 
coming  into  touch  with  a  primitive  tribe  or  group,  meant 
scarcity  and  privation.  The  struggle  for  existence  was 
bitter,  constant,  never-ending.  To  the  strong  and  the 
crafty,  to  the  tribe  which  stood  together  as  a  unit,  went  the 


GETTING  A  LIVING  9 

victory.  The  meek,  the  sympathetic,  and  the  weak  were 
pushed  to  the  wall  in  the  strenuous  primitive  world  of 
our  ages-distant  ancestors. 

Sympathy  and  charity  for  members  of  other  tribes  were 
inimical  to  the  welfare  of  fellow  tribesmen.  Cruelty  and 
ruthlessness  were  necessary  to  tribal  survival  and  success. 
Yet,  within  the  tribe  teamwork  was  essential.  The  members 
of  a  tribe  hunting  large  and  dangerous  game  or  fighting 
other  savages  must  band  together  and  hunt  and  fight  to- 
gether, or  suffer  destruction.  Even  in  the  hunting  stage 
primitive  man  began  to  learn  that  he  must  unite  with  others 
in  order  to  supply  his  wants  and  keep  out  of  danger.  The 
savage  as  well  as  the  civilized  man  cooperated  and  combined 
with  others ;  but  the  primitive  cooperating  group  was  small 
and  unstable.  War  in  the  hunting  stage  of  human  existence 
was  a  struggle  for  hunting  grounds  The  strong  tribes, 
the  tribes  that  were  strongly  knit  together,  obtained  the 
good  food  supply,  and  waxed  stronger. 

Slavery  was  not  found  in  the  hunting  and  fishing  stage, 
except  possibly  within  the  family.  Defeated  enemies  were 
slain ;  captives  were  not  taken.  A  slave  would  have  meant 
one  additional  person  to  feed ;  to  force  the  slave  to  hunt  for 
the  benefit  of  his  captors  was  dangerous  because  weapons 
must  be  given  him.  With  weapons  in  his  hand,  the  slave 
might  turn  upon  his  master;  or,  while  hunting,  the  former 
might  easily  escape.  The  captives  of  a  hunting  tribe  were 
therefore  killed ;  and  sometimes  they  were  eaten,  thus  add- 
ing to  the  food  supply. 

Because  of  the  scarcity  of  food  and  the  severity  of  the 
struggle  for  existence,  the  population  of  a  given  land  area, 
in  the  hunting  stage,  was  very  small.  The  hunting  tribe 
was  composed  of  a  small  number  of  persons;  the  govern- 


10  ELEMENTARY   ECONOMICS 

ment  of  the  group  was  weak  and  not  well  organized.  The 
physically  strong  men  and  the  old  men  who  were  shrewd 
and  wise  in  council  dominated.  The  primitive  man  faced 
a  multitude  of  dangers,  seen  and  unseen;  fear  of  impend- 
ing danger  was  ever  present.  He  who  was  supposed  to 
possess  the  power  to  propitiate  the  unseen  forces  was  looked 
up  to.  Religious  and  other  ceremonial  forms  were  empha- 
sized by  most  primitive  peoples.  The  uncertainty  of  life  and 
of  the  fortunes  of  the  chase  or  the  battle  are  responsible  for 
the  firm  belief  of  the  savage  in  luck  and  magic,  a  traditional 
concept  which  modern  people  have  not  entirely  outgrown. 

The  Pastoral  Stage.  The  domestication  of  animals 
enabled  the  primitive  man  to  obtain  a  food  supply  in  a 
better  and  somewhat  more  certain  fashion  than  that  em- 
ployed by  the  nut  gatherer,  the  hunter,  or  the  fisherman. 
The  pastoral  or  shepherd  people  were  able  to  increase  the 
supply  of  the  means  of  subsistence.  Plocks  and  herds  of 
domesticated  animals  or  of  semi-domesticated  animals 
afforded  a  fairly  stable  supply  of  milk  and  of  meat.  Like 
the  hunter,  the  pastoral  people  were  rovers.  They  moved 
as  their  flocks  required  new  pasturage.  The  steppe  country 
of  Asia  is  probably  the  original  home  of  the  pastoral  people. 
Private  property  in  flocks  and  herds  began  to  develop,  but 
not  private  ownership  of  land.  Little  personal  property 
was  obtained  because  little  could  be  carried  on  the  constant 
journeys  from  place  to  place.  In  this  stage  of  human 
development  are  found  the  beginnings  of  a  contrast  between 
rich  and  poor.  The  Jews  of  the  time  portrayed  in  the  Book 
of  Genesis  were  in  the  pastoral  stage,  as  were  also  the  Britons 
at  the  time  of  Caesar's  invasion. 

The  Agricultural  Stage.  The  crude  beginning  of  the 
cultivation  of  the  soil  marks  a  revolutionary  change  in  the 


GETTING  A  LIVING  11 

mode  of  living  and  of  associating.  The  first  signs  that 
foretell  the  rise  of  modern  civilization  are  found  in  the  dis- 
covery of  the  use  of  fire  and  of  agricultural  implements. 
As  increased  density  of  population  was  now  possible,  the 
soil  could  be  made  to  provide  a  greatly  increased  food 
supply.  Perhaps  a  thousand  times  as  many  people  could 
be  supported  on  a  given  area  under  primitive  hoe  culture 
as  could  find  subsistence  by  hunting;  and  many  more  can 
be  sustained  on  an  acre  under  better  and  more  modern 
agricultural  methods. 

Slavery  now  replaced  the  killing  of  captives  and  cannibal- 
ism. Instead  of  killing  and  eating  their  enemies,  the  con- 
querors put  the  captives  to  work.  Slavery  also  gave  man- 
kind a  much-needed  drill  and  discipline  in  hard  routine 
labor.  The  transformation  of  the  primitive,  restless  hunter, 
without  an  inkling  of  the  meaning  of  regularity  and  per- 
sistency, into  the  modern  business  man  and  routine  wage 
worker  has  indeed  been  a  long  and  difficult  process. 

With  the  development  of  primitive  agriculture  came 
fixed  habitations.  The  roving  tribe  was  gradually  changed 
into  a  group  which  recognized  one  spot  as  home  to  which 
the  men  returned  from  time  to  time.  The  men  of  the 
tribe  continued  to  be  hunters  and  warriors ;  but  the  women 
and  the  slaves  became  agricultural  workers.  The  idea  of 
private  property  in  land  began  to  appear.  Each  family 
wished  to  reap  the  fruits  of  its  toil;  and  this  meant  more 
or  less  exclusive  control  of  certain  plots  of  cultivated  or 
cultivatable  land.  Since  the  members  of  the  tribe  were 
more  permanently  located,  better  living  quarters  were 
presently  demanded.  The  rude  hut  or  house  was  soon 
built.  Tilling  the  soil,  planting  the  seed,  waiting  for  the 
harvest,  and  saving  the  necessary  seed,  all  required  a  gradual 


12  ELEMENTARY   ECONOMICS 

growth  of  foresight  unknown  to  the  shortsighted  and  shift- 
less hunter.  The  foundation  stones  of  modern  civiUzation 
were  laid  in  the  early  agricultural  stage. 

The  Small-tool  Age.  The  next  step  in  the  evolution  of 
human  society  is  the  small-tool  or  handicraft  stage.  Towns 
and  town  life  are  found  in  this  era.  America  was  discovered 
in  this  period  in  the  history  of  western  Europe.  The  Ameri- 
can pioneer  and  frontiersman  was  a  handicraftsman  using 
small  tools.  Manufacturing  was  always  carried  on  in 
pioneer  days  on  a  small  scale,  and  often  in  connection  with 
farming.  Craftsmen  as  a  rule  worked  for  themselves  and 
used  their  own  tools.  They  owned  the  raw  material  which 
they  used,  and  sold  the  finished  product.  Some  countries, 
for  example,  China  and  India,  have  not  as  yet  reached  the 
factory  stage  and  are  still  in  the  small-tool  era.  Certain 
industries  are  also  in  that  stage,  for  example,  the  arts  and 
crafts  industry,  cooking  in  private  homes,  and  peasant  farm- 
ing. 

The  Factory  Era.  The  use  of  steam  power  and  of  ma- 
chinery made  possible  the  factory.  The  opening  of  the 
factory  era  marked  a  revolutionary  change  in  living  and 
working  conditions.  It  is  often  called  the  industrial  revo- 
lution. England  was  the  first  nation  to  pass  into  the 
factory  era.  In  the  United  States,  it  began  about  a  century 
ago;  in  England,  nearly  a  century  and  a  half  ago.  With 
the  factory,  machinery,  and  the  use  of  steam  power,  came 
the  rapid  growth  of  cities.  The  workingmen  were  forced 
to  live  near  the  factories.  In  the  factory,  the  raw  material, 
the  machines  and  tools,  and  the  finished  product  belonged 
to  the  employer  or  capitalist.  The  workers  received  com- 
pensation in  the  form  of  wages.  Many  kinds  of  work  that 
had  hitherto  b^en  performed  in  the  homes  were  now  done 


GETTING  A  LIVING  13 

in  factories.  Both  the  working  and  the  home  environment 
change  greatly  as  a  country  passes  into  the  factory  era. 
Both  the  business  unit  and  the  governmental  unit  grow 
as  better  facilities  for  transportation  enlarge  the  market 
area. 

The  agricultural  stage  represents  the  high-water  mark  of 
slavery.  As  towns  developed  and  trade  grew,  slavery  was 
softened  into  serfdom  and  indentured  service,  and  finally 
into  the  wage  system  with  which  we  are  now  familiar.  The 
slave  system  has  never  been  able  to  obtain  a  firm  foothold 
where  either  the  small-tool  system  or  the  factory  has  held 
sway.  Neither  did  slavery  prove  efficient  on  the  small  farm 
which  produced  a  variety  of  crops,  such  as  has  been  char- 
acteristic for  years  of  the  northern  portion  of  the  United 
States. 

Nearly  all  the  important  political,  social,  and  economic 
problems  of  to-day  grow  out  of  the  development  of  factories 
and  great  cities.  Economics  and  sociology  are  fruits  of 
the  complex  machine  period.  The  nineteenth  century 
made  the  world  a  great  neighborhood.  We  of  to-day  are 
living  in  an  era  of  interdependence;  all  preceding  eras  or 
stages  in  human  evolution  have  been  predominantly  char- 
acterized by  self-sufficiency.  This  fact  may  be  brought  out 
clearly  and  concretely  by  considering  briefly  the  industrial 
evolution  which  has  been  going  on  in  our  own  country. 
Within  a  comparatively  brief  period  of  time  the  territory 
now  known  as  the  United  States  has  passed  from  the  hunt- 
ing and  fishing  stage  to  the  factory  era.  Indeed,  until  the 
western  frontier  line  faded  and  frontier  life  ended  a  short 
time  ago,  within  the  boundaries  of  the  United  States  could 
be  found  all  the  different  stages  of  industrial  development. 
Within  a  generation,  the  United  States  has  passed  from 


14  ELEMENTARY   ECONOMICS 

a  position  of  international  isolation  to  one  of  world 
leadership. 

These  five  stages  present  with  considerable  historical 
accuracy  the  course  of  events  in  the  evolution  of  human 
industry;  but  such  a  consideration  alone  omits  reference 
to  the  very  significant  changes  in  the  attitude  of  workers 
seeking  a  living  towards  the  methods  of  prosecuting  such 
endeavor.  The  primitive  man,  like  the  animals,  was  guided 
chiefly  by  instinct,  by  guesswork,  by  luck,  by  a  belief  in 
the  operation  of  magic,  and  by  a  reliance  upon  sacrificial 
ceremonies.  Only  in  recent  years,  after  the  factory  age 
has  been  reached,  do  reasoning  and  scientific  planning  in 
industry  displace  instinct,  luck,  guesswork,  and  reliance 
upon  magic.  Business,  the  use  of  markets,  and  division 
of  labor  reach  back  into  the  small-tool  and  even  into  the 
agricultural  stage ;  but  business  does  not  attain  a  high  state 
of  development  until  the  factory  period  is  entered.  Even 
war,  which  is  a  survival  coming  down  from  the  hunting  and 
fishing  stage,  is  now  to  a  large  degree  a  matter  of  technology. 
Factories  are  as  elsential  as  fortifications  and  firing  lines. 

The  primitive  man  would  not  hunt  or  go  to  war  unless 
the  signs  and  omens  were  auspicious,  or  until  he  had  sacrificed 
to  the  gods.  The  early  agriculturist  would  only  plant  at 
certain  times  and  according  to  certain  definite  ceremonial 
forms.  There  are  to-day  American  farmers  who  insist  that 
certain  crops  should  be  planted  ''  at  the  right  time  of  the 
moon."  The  great  majority  of  the  men  and  women  of 
to-day  are  influenced  by  certain  hard  and  unyielding  preju- 
dices and  inherited  concepts  coming  down  from  the  early 
ages  of  human  existence.  Reason  and  science  continually 
meet  as  obstacles  prejudice  and  superstition ;  but  gradually 
the  former  are  gaining  upon  the  latter. 


GETTING  A  LIVING  15 

TOPICS  FOR  DISCUSSION 

1.  Why  did  the  members  of  hunting  tribes  often  " go  hungry" ? 

2.  Why  was  it  necessary  for  primitive  men  to  band  together 
into  groups  and  tribes  ? 

3.  Why  did  the  beginnings  of  agriculture  cause  important  social 
changes  ? 

4.  Do  you  know  of  any  industries  now  in  the  small-tool  stage? 

5.  Are  you  acquainted  with  any  person  who  beUeves  in  "  signs  "  ? 


CHAPTER  II 
INDUSTRIAL  PROGRESS   IN   THE   UNITED   STATES 

Colonial  and  Pioneer  America.  During  the  colonial  and 
revolutionary  periods  in  American  history  and  for  some 
years  after,  industry  in  this  country  was  in  the  small-tool 
stage.  Manufacturing  was  carried  on  in  the  home  and  in 
the  small  shop.  The  typical  American  of  a  century  ago,  as 
in  the  earlier  periods  of  our  history,  was  the  hardy,  self- 
reliant  pioneer  farmer  who  lived  his  life  in  isolation  from  his 
fellow  men.  Each  family  produced  for  itself  nearly  all  that 
it  consumed.  Exchange  of  products  with  others  was  in- 
considerable. Meat,  butter,  grain,  and  horses  were  often 
exchanged  for  sugar,  salt,  spices,  and  certain  manufactured 
products,  such  as  farming  implements  and  tools.  The 
farmer  was  a  jack-of -all-trades.  He  was  not  only  a  farmer 
but  also  a  blacksmith,  carpenter,  butcher,  carrier  of  products, 
hunter,  and  primitive  policeman.  The  pioneer  performed 
numerous  tasks  each  and  every  day;  and  the  particular 
kind  of  tasks  to  be  performed  varied  with  the  weather  and 
the  season  and  the  year.  The  hours  of  daily  toil  were  long, 
usually  from  sunrise  to  sunset;  and  the  chief  sources  of 
power  were  three :  men,  horses,  and  oxen.  The  farmers 
and  other  workers  of  a  century  or  more  ago  knew  little  or 
nothing  of  the  minute  division  of  labor  and  the  routine 
work  with  which  we  of  to-day  are  so  familiar.  The  typical 
American  of  early  times  was  in  a  large  degree  independent 
of  the  outside  world.  He  knew  very  little  about  the  people 
and  the  living  conditions  beyond  the  boundaries  of  the 

16 


INDUSTRIAL  PROGRESS  IN  THE  UNITED  STATES      17 

township  or  the  county  or  possibly  the  state  in  which  he 
lived.  When  men  did  associate  or  work  together,  it  was  of 
necessity  only  in  small  groups.  There  were  no  large  cities 
and  no  huge  smoking  factories;  and  the  means  of  trans- 
portation and  of  communication  were  still  very  primitive 
and  extremely  slow  and  uncertain.  Before  the  Revolu- 
tionary War,  it  took  a  week  to  go  from  Boston  to  New  York 
City  —  a  distance  of  230  miles  by  stagecoach.  In  the  first 
years  of  the  nineteenth  century,  five  and  one-half  days  were 
required  to  journey  from  Philadelphia  to  Pittsburgh,  —  a 
distance  of  310  miles.  The  work  of  the  average  American  of 
a  century  ago  tended  to  bring  him  into  contact  with  many 
kinds  of  simple  productive  activity,  but  his  isolation  from 
the  outside  world  tended  to  give  him  a  narrow  and  pro- 
vincial view  of  life.  However,  the  railway  and  the  steamboat 
and  the  telegraph  were  soon  to  cause  revolutionary  changes. 
The  Nineteenth  Century.  The  nineteenth  century  was 
an  epoch  of  extraordinary  industrial  and  business  progress 
and  of  revolutionary  changes  in  social  and  political  con- 
ditions. The  economic  problems  to  be  studied  in  Part  III  are 
practically  all  products  of  the  nineteenth  century.  England 
led  the  way  in  the  use  of  machinery  and  of  steam  power. 
The  first  factories  were  for  the  manufacture  of  cloth.  By 
1820,  in  the  rapidly  growing  towns  and  cities  of  America,  a 
great  variety  of  craftsmen  were  working  at  their  trades, 
and  textile  factories  were  becoming  numerous.  The  old 
and  simple  industrial  era  was  changing  rapidly  in  the  north- 
eastern portion  of  the  United  States.  At  the  end  of  the 
century  there  were  more  than  a  half  million  manufacturing 
plants  in  this  country,  employing  over  five  million  wage 
earners,  and  annually  producing  products  valued  at  over 
thirteen    thousand    millions    of    dollars.     The    number    of 


18  ELEMENTARY   ECONOMICS  * 

workers  employed  in  manufacturing  alone  in  1900  was  nearly 
as  great  as  the  entire  population  of  the  nation  in  1800. 

The  completion  of  the  first  great  American  canal,  the 
Erie  Canal,  in  1825,  which  joined  the  Hudson  River  with 
the  Great  Lakes,  reduced  greatly  the  obstacles  to  trade  and 
communication  between  the  Atlantic  seaboard  and  the 
great  central  portion  of  the  nation.  The  pioneer  American 
railway  was  the  Baltimore  and  Ohio.  Construction  began 
in  1828 ;  in  1830,  thirteen  miles  of  line  were  placed  in  opera- 
tion^ The  first  transcontinental  railway  route  linking  the 
Pacific  coast  to  the  Mississippi  valley  and  the  Atlantic 
states  was  opened  in  1869.  The  railway  network  grew 
rapidly.  In  1850,  the  railway  mileage  was  9000;  in  1860, 
30,600;  in  1880,  93,000;  in  1910,  240,000.  Along  with 
the  evolution  of  the  railway  has  come  progress  in  manu- 
facturing, mining,  and  merchandising.^  A  brief  discussion 
of  the  growth  of  the  business  unit  and  of  one  particular 
industry  will  serve  to  illustrate  the  connection  between 
transportation  and  other  forms  of  industry,  as  well  as  to 
picture  the  course  of  events  during  the  nineteenth  century. 

Growth  of  the  Business  Unit.  The  pioneer  farmer  of 
the  Middle  West,  the  New  England  manufacturer  or  the 
city  storekeeper  of  the  Revolutionary  period,  was  not  en- 
gaged in  a  large  business.  Only  a  few  articles  were  pro- 
duced for  the  market,  and  those  articles  were  not  carried 
far.  Transportation  facilities  were  poor,  and  the  markets 
were  small  and  local.  Specialized  workers  and  special 
machines  were  not  employed,  because  it  was  not  profitable ; 
these  could  only  be  utilized  for  a  short  time  each  year.  A 
machine  to  turn  out  spokes  for  wagon  wheels  could  have 

1  For  further  statistics  in  regard  to  the  industrial  progress  of  the  country, 
see  any  industrial  history  of  the  United  States. 


INDUSTRIAL  PROGRESS  IN  THE  UNITED  STATES      19 

been  used  only  for  a  few  hours  each  year  by  the  country 
blacksmith  and  wagon  maker;  he  marketed  only  a  few 
wagons  each  year.  But  the  big  factory  of  to-day  uses  a 
machine  to  turn  spokes  for  wagon  wheels ;  so  many  wagons 
are  produced  each  year  that  this  special  machine  is  kept 
busy  all  the  time.  A  big  business  must  have  extensive 
markets ;  it  must  be  able  to  sell  many  of  each  variety  of 
articles  it  manufactures.  Specialized  workers  and  special 
machines  —  subdivision  of  labor  —  can  profitably  be  used 
only  in  large  factories  selling  to  extensive  markets. 

The  Evolution  of  the  Shoemaking  Industry  in  the  United 
States.  The  business  of  making  shoes  has  passed  through 
changes  which  are  typical  of  other  old  and  important  in- 
dustries. The  first  American  shoemaker  was  an  itinerant; 
he  went  from  home  to  home  carrying  his  tools  with  him. 
The  customer  for  whom  he  worked  furnished  the  leather 
and  owned  the  boots  or  shoes  produced.  The  shoemaker 
was  paid  for  the  work  done  in  the  home  of  his  customer. 
No  problems  concerning  the  price  of  shoes  arose  under  this 
crude  and  small-scale  method  of  making  shoes;  there  was 
as  yet  no  merchant-function  in  the  shoe  business. 

Gradually  the  itinerant  shoemaker  was  replaced  by  the 
"  settled  shoemaker  "  who  owned  his  little  shop.  He  no 
longer  went  to  his  customers ;  they  came  to  his  shop.  The 
shoemaker  bought  his  raw  material  and  worked  it  into  boots 
and  shoes  made  to  the  order  of  his  customer.  The  shoe- 
maker became  a  merchant  as  well  as  a  shoemaker ;  he  per- 
formed a  double  function.  Price  problems  now  appeared. 
Presently  another  step  was  taken.  Whenever  the  shoemaker 
had  spare  time,  he  commenced  to  make  shoes,  without 
waiting  for  a  specific  order  from  a  customer.  Out  of  this 
habit  the  shoemaker  developed  the  function  of  a  retail  shoe 


20  .       ELEMENTARY   ECONOMICS 

merchant.  The  front  of  his  shop  was  partitioned  off  for  a 
shoe  store,  and  the  rear  of  the  building  continued  to  be  the 
shop  proper  where  the  shoes  were  made.  But  the  market 
was  as  yet  only  local  and  not  extensive.  The  shoemaker, 
as  his  business  grew,  hired  other  workers  and  devoted  much 
of  his  time  to  selling  shoes. 

The  next  stage  in  the  evolution  of  the  business  began 
when  the  merchant-shoemaker  decided  to  seek  a  wider 
market  for  his  shoes.  Samples  were  carried  by  traveling 
salesmen  to  more  distant  customers  or  to  merchants  in  other, 
but  near-by,  towns.  The  business  becomes  in  part  whole- 
sale; and  the  work  of  actually  making  the  shoes  passes 
almost  entirely  into  the  hands  of  journeyman  shoemakers 
hired  by  the  merchant.  The  shoemaker  is  now  a  wage- 
worker  in  the  employ  of  the  shoe  merchant.  The  goods  are 
transported  over  the  highway  or  by  water.  With  the 
development  of  the  railway,  the  market  area  grows  larger, 
and  the  distinction  between  the  wholesale-employer  and 
thefetail  shoe  merchant  grows  more  and  more  sharp.  Shoes 
are  still  made  by  hand  with  the  use  of  the  old  hand  tools, 
but  the  merchant  is  no  longer  a  journeyman  shoemaker. 

Finally,  machinery  is  invented  in  the  shoe  industry,  and 
the  old  shoemaker  sitting  at  his  bench  is  displaced  by  factory 
hands.  Subdivision  of  labor  becomes  the  order  of  the  day. 
One  worker  no  longer  makes  a  whole  shoe;  each  factory 
worker  performs  one  small  portion  of  the  entire  work  of 
making  a  shoe.  The  trade  of  the  journeyman  shoemaker 
has  been  destroyed  by  the  invention  and  use  of  shoe  ma- 
chinery. The  manufacturer-employer  now  directs  the  busi- 
ness ;  he  owns  the  factory,  the  raw  material  and  the  finished 
product,  and  he  also  hires  the  factory  wageworker.  The 
manufacturer  sells  the  machine-made  products  to  the  whole- 


INDUSTRIAL  PROGRESS  IN  THE  UNITED  STATES      21 

sale  merchant,  and  the  latter  in  turn  furnishes  shoes  to  the 
retail  shoe  merchant.  In  recent  years,  some  shoe  manu- 
facturers have  been  selling  directly  to  the  retail  store,  thus 
'eliminating  the  wholesaler  or  jobber.  The  great  shoe 
factory  only  became  a  practicable  business  proposition, 
however,  after  transportation  and  credit  facilities  were  well 
developed.  The  factory  signifies  a  national  or  a  world 
market. 

The  Twentieth  Century.  In  the  opening  years  of  the 
twentieth  century,  the  scene  has  entirely  changed.  The 
pioneer  and  isolated  farmer  is  now  found  only  in  a  few 
out-of-the-way  places;  he  is  out-of-date  and  unusual.  Ap- 
proximately one  half  of  the  people  of  the  United  States  are 
living  under  urban  conditions.  The  typical  farmer  of  to-day 
no  longer  does  blacksmithing,  carpentering,  butchering, 
transporting,  hunting,  or  police  duty.  He  exchanges  much 
that  he  produces  on  the  farm  for  other  products  made  else- 
where. The  railway,  the  express,  the  telephone,  good 
roads,  the  automobile,  rural  mail  delivery,  and  a  multi- 
tude of  other  modern  Knstrumentalities,  have  destroyed  the 
isolation  so  characteristic  of  earlier  America;  they  have 
also  transformed  the  economically  independent  American 
into  the  economically  interdependent  American.  A  big 
railway  strike  would  bring  hunger  and  privation  to  the 
doors  of  millions  of  homes.  Even  a  street  railway  tie-up 
is  sufficient  to  throw  the  business  of  a  city  into  disorder.  A 
coal  strike  involving  a  large  number  of  miners  would  direct 
a  heavy  blow  at  the  industries  of  the  nation. 

The  Complexity  of  Modern  Life.-  The  intricacy  of  the 
industrial  life  of  to-day  becomes  evident  if  we  stop  to  con- 
sider the  processes  by  which  we  ordinarily  and  regularly 
obtain  almost  any  of  the  commodities  which  are  offered  in 


22  ELEMENTARY   ECONOMICS 

the  markets  of  our  city  or  town.  We  find,  for  example, 
on  the  breakfast  table  in  the  morning  an  orange  grown  in 
California.  This  orange  was  grown  on  a  fruit  farm.  The 
farm  was  owned  by  the  farmer  operating  it ;  but  he  is  pro- 
tected in  his  right  to  private  ownership  by  the  strength  of 
organized  government.  His  deed  to  the  land  is  recorded 
by  a  county  official,  and  the  owner  cannot  be  arbitrarily 
dispossessed  of  his  land.  He  expends  money  and  effort 
upon  the  fruit  farm  because  he  knows  that  society,  through 
its  governmental  machinery,  is  prepared  to  protect  his 
property  from  the  illegal  acts  of  others. 

The  fruit  grower  cultivates  the  land  and  sets  out  the 
orange  trees.  He  uses  many  tools  and  implements  ob- 
tained from  many  different  sources  and  involving  the  effort 
and  ability  of  many  different  people.  The  oranges  develop 
in  due  time  and  are  picked  and  crated.  The  crates  are 
transported  to  the  railway  depot  by  means  of  horses  and 
wagons  or  automobile  trucks.  Again,  it  must  be  noted 
that  many  people  —  mechanics,  woodworkers,  miners,  and 
others  —  were  concerned  in  the  production  of  the  wagons 
or  the  automobile.  The  oranges  are  transported  to  your 
city  or  town.  The  railway  employees  are  a  host  of  workers, 
—  engineers  and  other  trainmen,  switchmen,  clerks,  depot 
workers,  section  men,  and  many  others.  And,  remember, 
the  railway  was  constructed,  the  tracks  laid,  the  rails  fash- 
ioned, the  locomotives  and  the  cars  built,  the  coal  provided, 
and  the  signaling  devices  manufactured  by  still  other  workers, 
some  of  whom  worked  years  ago.  The  rates  charged  by 
the  railway  are  regulated  by  governmental  officials.  Rail- 
way securities  are  bought  and  sold  on  the  stock  exchange. 
Almost  all  kinds  of  industry  are  directly  or  indirectly  con- 
nected with  the  railway  business. 


INDUSTRIAL  PROGRESS  IN  THE  UNITED  STATES     23 

The  crates  of  oranges  are  often  consigned  to  a  wholesale 
fruit  merchant  who  sells  them  to  the  grocer  or  retail  fruit 
merchant,  and  the  latter  in  turn  sells  and  delivers  to  your 
home  the  orange  which  is  found  on  your  breakfast  table. 
The  oranges  are  paid  for  by  the  use  of  money  or  of  a  check. 
Money  necessitates  a  government  mint  or  printing  estab- 
lishment; the  check  signifies  a  well-organized  banking 
system.  Both,  the  money ^and  the  check,  and  indeed  the 
whole  business  mechanism,  imply  the  reign  of  law  and  order ; 
both  indicate  the  existence  of  courts,  police  systems,  and 
organized  government. 

Industry  —  business  —  to-day  is  a  very  complex  piece 
of  social  machinery,  carried  on  for  the  purpose  of  satisfying 
human  wants.  Each  individual  is  directly  or  indirectly 
served  by  a  multitude  of  individuals  living  and  dead.  And 
in  turn  each  worker  produces  articles  or  services  which  may 
go  to  many  different  people  in  widely  separated  places. 
The  oranges  of  the  fruit  grower  finally  reach  many  different 
people  located  in  all  the  cities  and  states  of  the  United  States 
and  perhaps  also  in  foreign  countries. 

If  the  student  will  attempt  to  follow  through  a  similar 
process  in  the  case  of  a  loaf  of  bread,  a  bottle  of  ink,  a  steel 
rail  or  a  watch,  the  intricacy  and  interdependence  of  modern 
industry  will  again  be  clearly  revealed.  The  bread  upon 
the  dining-room  table,  the  plates,  the  table  itself,  the  house 
in  which  you  live  and  the  school  building  in  which  you  are 
studying,  —  all  are  the  products  of  the  work  of  hundreds 
and  thousands  of  persons  interested  in  earning  a  living  for 
themselves  and  their  families.  But,  in  spite  of  the  com- 
plexity of  modern  life,  the  motive  forces  which  lead  to  activity 
in  the  case  of  the  pioneer  farmer  or  of  the  routine  worker 
in  the  modern  factory  are  in  essence  not  greatly  dissimilar. 


24  ELEMENTARY   ECONOMICS 

Our  participation  in  the  Great  War  has  taught  even  the 
most  careless  and  unthinking  person  that  the  individual 
must  be  restrained  in  the  interest  of  the  group.  Extrava- 
gance, waste,  inefficiency,  and  idleness  are  of  vital  national 
import.  The  world  has  been  brought  face  to  face  with 
the  specter  of  a  world  famine.  The  easy  optimism  which 
declared  that  the  steam  engine  and  modern  science  made  a 
famine  impossible  is  now  discredited.  The  old  fundamental 
truth  that  everybody,  rich  or  poor,  should  do  some  useful 
work  has  come  into  the  foreground.  War  and  a  period  of 
national  stress  make  it  clear  that  the  idler  is  a  parasite  and 
a  social  nuisance. 

TOPICS   FOR   DISCUSSION 

1.  Contrast  the  living  conditions  of  the  pioneer  farmer  with 
those  with  which  you  are  familiar. 

2.  Trace  the  business  activities  involved  in  the  deUvery  of  milk 
each  morning. 

3.  Which  kind  of  work  is  preferable,  —  that  of  the  shoemaker, 
working  with  hand  tools,  or  of  the  machine  tender  in  a  modern  shoe 
factory?     Why? 


PART  II 
FUNDAMENTAL  ECONOMIC  CONCEPTS 


CHAPTER  III 
THE  PRODUCTION   OF  COMMODITIES 

Why  Business  Is  Carried  On.  In  the  normal  times  of 
peace,  the  great  majority  of  the  men  and  women  of  the 
United  States  are  workers,  —  in  shops  and  factories,  in 
stores,  in  offices,  on  railways  and  steamships,  on  the  farms, 
in  the  homes,  and  in  many  other  work-places.  In  the  study 
of  economics,  we  are  interested  in  the  work  of  the  world 
or,  in  other  words,  in  the  business  activity  of  the  com- 
munity or  of  the  nation.  Why  is  business  carried  on? 
Why  do  so  many  people  work  hard  day  after  day,  year  in 
and  year  out?  The  great  majority  of  people  work  to  get 
a  living  or  a  living  plus  a  variety  of  commodities  and  serv- 
ices which  make  life  comfortable  and  enjoyable.  Unfor- 
tunately, the  typical  worker  does  not  enjoy  his  work.  He 
is  anxious  for  the  whistle  to  blow  at  night;  and  he  dis- 
likes to  hear  it  in  the  morning.  One  of  the  big  unsolved 
industrial  problems  is  that  of  substituting  joy  in  work  for 
the  prevalent  disinclination  to  produce. 

Under  present  conditions  in  industry,  men  work  in  order 
to  satisfy  their  wants  or  desires.  This  is  the  primary  or 
fundamental  reason  for  business  activity.  As  has  been 
indicated,  these  wants  are  many  and  varied.  They  range 
from  the  desire  for  bread  and  butter  to  sustain  life  to  the 
desire  for  personal  adornment;  and  from  the  desire  for  a 
simple  plaything  on  the  part  of  the  child  of  poverty  to  the 
multi-millionaire's  craving  for  the  magnificent  yacht.  Men 
work  —  business  is  carried  on  —  in  order  to  supply  these 

27 


28      '  ELEMENTARY   ECONOMICS 

multitudinous  wants  of  the  people  of  the  nation  and  of  the 
world.  Business  in  your  town  or  city  or  state  is  carried  on 
for  the  purpose  of  producing  commodities  or  services  which 
people  desire  and  will  purchase.  Barbers,  photographers, 
lawyers,  merchants,  farmers,  milkmen,  and  carpenters 
work  —  do  business  —  because  people  pay  them  for  doing 
so,  because  by  working  they  are  able  to  earn  a  living,  because 
in  this  way  they  can  obtain  the  purchasing  power  by  means 
of  which  their  desires  may  be  satisfied. 

(^feusiness  means  teamwork;  each  worker,  manual  or 
mental,  skilled  or  unskilled,  has  his  own  particular  job  and 
his  place  and  manner  of  doing  work.  Each  worker,  from 
the  humble  and  most  unskilled  to  the  most  capable  and 
skillful,  is  doing  a  part  of  the  great  whole  which  may  be 
termed  the  ''  world's  work."  In  order  that  all  these  various 
workers  may  do  the  work  fairly  efficiently  and  effectively, 
in  order  that  the  goods  and  services  that  consumers  want 
rather  than  those  which  are  not  desired,  may  be  produced 
and  distributed  to  the  consumers,  capable  directors,  who 
may  be  named  enterprisers,  are  essential.  It  is  the  function 
of  the  enterpriser  to  ascertain  and  supply  the  wants  of 
consumers.  The  enterpriser  is  a  big  or  little  captain  of 
industry. 

Business  activity  is  directed  by  the  capable  enterpriser 
so  as  to  produce  the  commodities  and  services  which  satisfy 
the  wants  —  good,  bad,  or  indifferent  —  of  the  purchasers 
or  consumers.  The  desire  for  intoxicating  liquors  has  built 
up  a  great  business.  The  desire  for  candy  and  the  desire 
for  breakfast  foods  have  likewise  caused  important  busi- 
nesses to  thrive.  Business  men  cater  to  the  bad  as  well 
as  to  the  beneficial  demands  of  consumers.  The  urge  for 
profits  often  drives  men  to  do  that  which  they  know  is 


THE   PRODUCTION   OF   COMMODITIES  29 

socially  undesirable;  but  by  so  doing  they  make  a  living 
and,  perhaps,  more  than  a  living.  On  the  other  hand,  when 
the  want  or  desire  for  a  product  disappears,  the  business  of 
catering  to  that  desire  stops. 

Exchange.  At  the  present  time  nearly  all  workers  are 
paid  in  money.  With  this  money  they  purchase  the  com- 
modities which  they  want,  —  food,  clothing,  shelter,  amuse- 
ments, and  many  other  items.  In  primitive  and  even  in 
more  recent  pioneer  days,  very  little  money  was  used. 
There  was  little  buying  and  selling;  and  many  of  the  ex- 
changes were  accomplished  without  the  aid  of  money. 
The  few  things  which  the  pioneer  family  did  purchase  from 
outside  were  nearly  all  paid  for  in  grain  or  meat,  or  some 
other  farm  product.  The  pioneer  came  into  possession 
of  very  little  money. 

But  to-day  the  average  laborer,  the  worker  you  know,  is 
a  specialized  worker  and  he  receives  wages  for  his  labor. 
Even  the  farmer  sells  nearly  everything  he  produces  for 
money,  and  with  the  money  buys  the  many  tools,  the  cloth- 
ing, the  wagons,  and  even  much  of  the  food  that  he  and  his 
family  need.  Some  workers  to-day  are  shoe  factory  em- 
ployees; others  are  furniture  makers,  carpenters,  railway 
trainmen,  expressmen,  milkmen,  farmers,  miners,  actors, 
teachers,  and  so  on  through  a  long  list  of  occupations. 
Practically  all  these  classes  of  workers  work  for  wages,  fees 
or  profits  which  are  paid  to  them  in  money ;  and  in  turn  they 
use  the  purchasing  power  which  the  money  gives  them  to 
buy  the  sundry  commodities  and  services  which  they  want 
or  desire.  The  shoe  factory  worker,  for  example,  makes 
shoes  or  parts  of  shoes  for  people  living  in  many  different 
places,  for  persons  he  has  never  seen  and  probably  never 
will  see.     In  turn,  a  great  multitude  of  workers  of  various 


30  ELEMENTARY   ECONOMICS 

professions,  trades,  and  occupations  aid  in  making  the  goods 
and  performing  the  services  which  the  shoe  factory  worker 
purchases  with  his  wages.  Each  wage  earner  and  each 
professional  man  works  for  many  people ;  and  a  vast  army 
of  workers  toil  for  you  and  for  your  friends ;  that  is,  a  host 
of  people  make  the  commodities  and  perform  the  services 
you  and  your  friends  purchase  with  the  money  which  you 
and  your  friends  obtain  directly  or  indirectly  as  wages,  or 
as  income  from  property. 

Business  is  a  great  cooperative  affair.  Farmers,  lumber- 
men, factory  workers,  storekeepers,  railway  employees, 
lawyers,  bankers,  actors,  teachers,  —  all  are  working  to 
satisfy  their  mutual  wants.  Thousands  of  men  and  women 
in  this  and  other  countries  have  been  working  last  year, 
yesterday,  to-day,  in  order  that  you  and  other  persons  in 
your  town  may  have  to-day  the  necessities,  comforts,  and 
pleasures  of  life.  And  each  worker  has  contributed"  his 
mite  to  the  great  mass  of  products  and  services  which  make 
up  the  income  of  the  nation.  "  Each  is  working  for  all ; 
all  are  working  for  each."  It  can  readily  be  seen  that  the 
pioneer  farmer  toiled  for  each  and  every  member  of  his 
family ;  it  is  also  clear  that  the  wife  and  motlier  did  like- 
wise. If  the  farmer  were  lazy  and  inefficient,  the  family 
income  evidently  would  be  small.  The  family  would  suffer 
because  of  the  small  output  of  the  farm.  It  is  as  true,  but 
not  so  easily  comprehended,  that  idleness,  inefficiency,  and 
useless  work  reduce  the  sum  total  of  the  national  income 
or  dividend.  National  prosperity,  comfort,  and  happiness 
require  efficiency.  From  this  point  of  view,  the  nation  is 
the  pioneer  family  written  in  larger  letters. 

Income  can  also  be  obtained  by  individuals  in  other  ways 
than  through  business  activity.    The  owner  of  land  or  of 


THE   PRODUCTION   OF   COMMODITIES  31 

capital  may  derive  an  income  by  allowing  others  to  use  his 
property.  But  such  income  can  be  paid  to  the  inactive 
owner  only  because  some  one  else  does  utilize  the  land  or 
the  capital  in  some  kind  of  business  activity.  Payments 
are  made  to  inactive  owners  only  because  the  capital  and 
land  are  important  aids  in  production.  The  satisfaction 
of  the  wants  or  the  desires  of  the  inactive  income  receivers 
as  well  as  of  the  active  producers  is  a  normal  result  of  busi- 
ness activity.  The  original  sources  of  both  incomes  are 
the  same. 

Classification  of  Industries.  Industries  may  logically  be 
arranged  in  five  general  classes:  extractive,  transforming, 
transporting,  exchanging,  and  personal  service.  The  ex- 
tractive industries  are  those  which  obtain  material  out  of 
which  useful  articles  are  made.  These  may  be  te  med 
primary  industries.  The  chief  extractive  industries  are 
agriculture,  mining,  fishing,  and  lumbering.  Manufacture 
of  all  kinds  transfornis  the  raw  material  furnished  by  the 
extractive  industries.  Material  is  made  more  useful  and 
more  valuable  by  changing  its  form.  Manufacture,  for 
example,  changes  crude  iron  ore  such  as  comes  from  the 
mine  into  the  hairspring  of  a  watch  or  into  a  steel  rail. 
The  transporting  industries  convey  goods,  persons,  and 
intelligence  from  one  place  or  locality  to  another  where  the 
need  is  greater,  and  in  this  way  aid  in  satisfying  wants  and 
desires.  The  chief  means  of  transportation  are  the  railway, 
automobile  trucks  or  passenger  cars,  water  and  air  vehicles, 
pipe  lines  to  convey  water,  gas,  and  oil,  telegraph  and  tele- 
phone wires,  lines  for  the  transmission  of  electrical  energy, 
and  the  wireless  telegraph  and  telephone. 

The  work  of  the  exchanging  industries  is  that  of  aiding 
other   forms  of  industry  in  getting  goods  into  the  hands 


32  ,     ELEMENTARY   ECONOMICS 

of  the  consumer;  the  exchanging  industries  facilitate  the 
change  of  ownership  of  commodities.  The  chief  exchanging 
industries  are  wholesale  and  retail  stores  of  all  kinds^  and 
banks.  The  personal  servant  performs  services  instead 
of  aiding  the  flow  of  material  commodities  toward  the  con- 
sumer. Among  those  performing  personal  service  may  be 
mentioned  barbers,  physicians,  teachers,  preachers,  lectur- 
ers, actors,  and  domestic  servants. 

Essentials  of  Big  Business.  The  student  should  see 
clearly  that  good  transportation  facilities  are  essential  to 
big  business.  Railways  make  it  possible  for  a  factory  to 
sell  its  goods  in  distant  places.  Railways  allow  extensive 
markets  to  come  into  existence,  which  in  turn  lay  the  founda- 
tions upon  which  large  business  enterprises  are  built.  The 
effect  of  improved  transportation  upon  the  market  for  wheat 
is  well  illustrated  by  a  computation  made  before  the  opening 
of  the  Great  War.  The  price  of  wheat  in  the  market  was 
assumed  to  be  one  dollar  per  bushel.  By  wagon  over  the 
ordinary  highway,  the  expense  of  transportation  for  300 
miles  was  estimated  to  be  equal  to  the  price  of  wheat  at  the 
market.  Over  the  modern  railway,  the  expense  of  trans- 
porting wheat  7000  miles,  or  twenty-three  times  as  many 
miles,  was  calculated  to  equal  the  market  price.  A  farmer 
of  to-day  producing  wheat  has  a  much  wider  range  of  pos- 
sible markets  than  did  the  farmer  of  the  pre-railway  period. 
Without  excellent  transportation  facilities,  our  grain  could 
not  be  grown  in  the  West,  our  collars  manufactured  in 
Troy,  New  York,  or  our  breakfast  food  prepared  in  Battle 
Creek,  Michigan. 

The  inventions  and  improvements  in  transportation  are 
not  the  only  essential  factors  in  developing  large-scale  busi- 
ness.     The  substitution  of  the  power  of  coal  and  of  falling 


THE   PRODUCTION   OF   COMMODITIES  33 

water  1:hrough  the  use  of  steam  and  electricity  for  the  mus- 
cular power  of  men  and  animals  is  necessary  in  order  to 
make  the  wheels  of  the  factory  go  around.  In  big  business, 
turning,  carrying,  and  lifting  must  be  done  by  some  other 
power  than  man-power.  Labor-saving  devices  and  natural 
—  non-human  —  power  are  two  prime  essentials  in  modern 
large-scale  industry.  Modern  industry  and  present-day 
civilization  are,  in  a  large  degree,  machine-made. 

An  article  which  can  be  profitably  produced  by  large- 
scale  methods  must  be  one  which  many  persons  desire  to 
purchase.  No  matter  how  excellent  the  transportation 
facilities  may  be,  an  article  desired  by  only  a  few  persons 
will  be  produced  only  by  small-scale  methods.  Again,  the 
demand  for  an  article  must  be  to  a  considerable  degree 
standardized  before  large-scale  manufacture  becomes  profit- 
able. A  tailor-made  suit  of  clothes,  made  according  to 
the  measurements  of  one  individual,  is  usually  made  in  a 
small  shop.  Ready-made  clothing  and  overalls  are  usually 
made  in  a  factory.  In  the  first  case,  each  unit  is  made 
differently ;  in  the  second  example,  the  product  is  standard- 
ized within  a  certain  class  or  group.  The  familiar  Ford 
automobile  is  an  excellent  example  of  standardization.  The 
manufacturer  has  developed  only  one  type  of  machine. 
Parts  made  in  Detroit  may  be  shipped  to  other  cities  and 
the«e  assembled.  Standardization  and  interchangeability 
of  parts  are  characteristics  of  large-scale  business. 

Articles  which  cannot  be  standardized,  such  as  tailor- 
made  clothing,  or  commodities  for  which  the  demand  is 
small,  such  as  expensive  jewelry,  will  continue  to  be  made 
according  to  small-scale  or  handicraft  methods.  Portrait 
painting  and  the  production  of  arts-and-crafts  goods  are 
small-scale    businesses.     Cooking    and    laundering    are    in 


34  ELEMENTARY   ECONOMICS 

the  process  of  being  transferred  from  small-scale  to  large- 
scale  industries.  Agriculture  is,  with  few  exceptions,  still 
in  the  small-scale  stage. 

TOPICS  FOR  DISCUSSION 

1.  Write  a  brief  description  of  an  ordinary  day's  work  performed 
by  some  person  you  know. 

2.  Why  was  the  day's  work  performed  ? 

3.  Were  the  results  beneficial  to  others  than  the  person  doing  the 
work? 

4.  Make  a  Ust  of  fifty  different  occupations. 

5.  Arrange  these  fifty  occupations  into  five  groups  on  the  basis 
of  similarity. 


CHAPTER  IV 
WANTS  AND   VALUE 

Why  Do  People  Want  Commodities?  Since  business  is 
carried  on  in  order  to  enable  men  and  women  to  satisfy 
their  wants,  we  must  next  consider  human  wants.  Why  do 
people  want  commodities  and  services?  Do  all  have  the 
same  wants?  Are  wants  always  the  same  in  different 
times  and  places?  Certainly  different  people  have  quite 
different  wants.  No  two  persons  have  exactly  the  same 
wants  or  desires.  Moreover,-  the  demands  of  any  one 
person  vary  from  time  to  time  and  with  change  of  habita- 
tion. As  a  person  grows  older  certain  desires  which  were 
strong  in  youth  fade  and  give  place  to  others.  Again,  our 
wants  art  somewhat  different  in  summer  from  those  of  the 
winter  season.  It  is  this  variety  and  constantly  shifting 
character  of  wants  which  give  rise  to  the  multiplicity  of 
business,  and  to  the  ever-changing  nature  of  business. 

To  answer  the  question  —  Why  do  people  want  com- 
modities and  services  ?  —  is  more  complex  and  difficult. 
The  satisfaction  of  certain  wants  is  absolutely  necessary. 
Food,  clothing,  and  shelter  are  in  some  degree  necessary  in 
this  climate.  But  only  a  small  portion  of  the  business 
activity  of  the  United  States  or  of  any  other  civilized  nation 
9  is  directed  toward  producing  the  minimum  necessities  for 
the  maintenance  of  life  and  vigor.  We  seek  comforts  and 
luxuries ;  we  desire  not  only  food,  but  food  well  cooked  and 
daintily  served.    Clothes  of  a  certain  style,  without  much 

35 


36  ELEMENTARY   ECONOMICS 

regard  for  the  practical  matter  of  warmth,  are  demanded; 
and  more  are  wanted  than  were  considered  necessary  by 
the  pioneer.  Dress  suits,  party  dresses,  neckties,  Unen 
collars,  jewelry,  and  so  on,  through  a  long  and  constantly 
changing  list,  are  purchased.  Houses  with  modern  con- 
veniences are  in  demand.  Men  and  women  of  to-day  want 
not  only  bread  and  butter  but  also  "  jam  on  the  bread  '* ; 
they  wish  not  merely  clothes  but  stylish  clothes;  they  ask 
not  only  for  shelter,  but  for  a  house  which  is  as  good  as 
that  belonging  to  their  friend.  Many  wants  are  purely 
conventional.  We  want  certain  commodities  because  others 
have  them,  because  it  is  the  style,  or  because  the  ownership 
indicates  that  we  have  a  large  income.  Business  men  cater 
to  these  wants  and  often  stimulate  them  through  judicious 
advertising. 

Utility.  The  quality  which  makes  goods  or  services  de- 
sirable is  designated  utility,  and  is  to  be  found  in  all  com- 
modities which  men  and  women  seek.  Air,  water,  bread, 
a  suit  of  clothes,  tobacco,  —  all  possess  utility ;  these  arti- 
cles are  serviceable,  and  are  desired  by  men  and  women. 
Of  course,  individual  tastes  differ.  Certain  commodities 
may  possess  no  utility  in  the  estimation  of  one  person  and, 
on  the  other  hand,  be  considered  to  possess  utiUty  by  another. 
A  canceled  postage  stamp  may  possess  utility  for  the  stamp 
collector ;  but  for  others  it  may  be  without  utility. 

Our  wants  for  a  given  article  change  as  we  obtain  and 
consume  additional  units  of  the  commodity.  To  a  hungry 
man  the  first  slice  of  bread  consumed  gives  great  satisfac- 
tion. The  second  slice  gives  slightly  less ;  and  the  third  still  ^ 
less.  If  the  man  continues  to  consume  slice  after  slice, 
presently  his  desire  for  bread  will  be  satiated.  He  will 
crave  no  more  for  the  present;  and  to  continue  consuming 


WANTS  AND   VALUE  37 

bread  would  soon  bring  discomfort.  This  phenomenon  of 
diminishing  desire  or  of  diminishing  utility  is  also  found  in 
connection  with  commodities  other  than  food.  We  want 
one  house  very  much;  but  few  of  us  have  great  desire  for 
a  second  for  our  own  use.  The  second  hat  has  less  utility, 
it  satisfies  a  less  intense  desire  than  the  first,  and  the  third 
has  much  less  utility  for  us  than  the  second.  As  a  conse- 
quence, when  the  supply  of  a  given  article  is  greatly  in- 
creased, the  tendency  is  to  use  it  to  satisfy  less  and  less 
intense  wants.  Salt  is  quite  plentiful.  It  is  utilized  not 
merely  to  satisfy  the  intense  wants  of  human  beings  in 
cooking;  but  it  is  also  used  for  many  other  less  important 
purposes,  —  for  example,  in  connection  with  the  manufacture 
of  ice  cream.  If  salt  were  much  less  plentiful,  it  would  not 
be  used  for  the  latter  purpose.  Sometimes  an  article  pos- 
sessing utility  may  become  so  plentiful  that  it  is  no  longer 
serviceable.  Water  in  a  time  of  flood  possesses  disutility 
rather  than  utility. 

Consumption  gives  greater  satisfaction  when  a  variety 
of  goods  are  consumed  than  when  the  consumer  is  restricted 
to  a  small  range  of  choice.  A  dinner  of  bread,  butter,  and 
potatoes  will  be  less  gratifying  than  one  in  which  a  greater 
range  of  choice  is  offered.  The  pioneer  was  obliged  to  be 
content  with  very  little  variety  in  his  selection  of  consum- 
able commodities;  but  industrial  advance  and  improved 
transportation  facilities  make  possible  a  greater  variety.  A 
wide  range  of  choice  tends  to  increase  the  well-being  of  the 
community.  In  order  to  obtain  the  greatest  possible  satis- 
faction from  consumable  goods,  attention  must  also  be  given 
to  the  "  law  of  harmony."  In  order  to  obtain  pleasing 
results  in  art,  architecture,  or  painting,  harmonious  colors 
and  materials  must  be  selected;  the  same  holds  true  in 


38  ELEMENTARY   ECONOMICS 

regard  to  the  more  common  and  prosaic  matters,  —  such 
as,  for  example,  in  the  selection  of  food  and  clothing. 

Why  Are  Land  and  Capital  Desired  ?  It  is  clear  that 
consumable  goods  such  as  food  and  clothing  are  wanted 
because  of  the  satisfaction  afforded  by  their  consumption. 
But  land  and  capital  goods  such  as  tools,  machinery,  factory 
buildings,  are  not  consumed ;  no  wants  are  directly  satisfied 
by  these  commodities.  Why  then  do  men  and  women  desire 
capital  goods?  Why  do  they  purchase  non-consumable 
commodities  ?  Land  and  capital  are  instrumentalities  which 
give  assistance  in  producing  commodities  and  services  which 
people  desire  for  purposes  of  consumption.  We  work  and 
play  upon  land,  —  the  earth's  surface.  Land  is  desirable 
when  it  is  advantageously  located  for  business,  residential, 
or  recreational  purposes.  Land  is  needed  in  all  kinds  of 
business,  —  agriculture,  manufacturing,  merchandising,  rail- 
roading. The  airship  needs  a  considerable  area  of  land  for 
the  beginning  and  the  safe  ending  of  a  flight.  Land  is  needed 
for  playgrounds,  athletic  fields,  parks  and  race  tracks. 
Land  is  valuable  because  it  does  not  exist  in  unlimited  quan- 
tities and  because  it  must  be  had  to  enable  men  and  women 
to  do  their  daily  work  and  enjoy  their  daily  pleasures.^ 

Capital  goods  consisting  of  such  articles  as  factory  and 
store  buildings,  tools,  machinery,  railway  tracks,  and  steam- 
ship docks,  when  properly  utilized,  enable  the  workers  of 
the  world  to  produce  more  than  could  be  produced  without 
their  assistance.  Capital  goods  have  value  and  may  be 
bought  and  sold  on  the  market,  for  the  reason  that  such 
goods  are  scarce  and  because  desirable  consumable  goods 
and  services  come  into  being  as  a  result  of  the  utilization 
of  capital  goods.     Capital  goods  are  valued  because  of  the 

1  Further  discussion  of  this  point  will  be  found  in  Chapter  VI. 


WANTS  AND   VALUE  39 

assistance  given  by  such  goods  in  the  production  of  con- 
sumable commodities. 

Value.  Business  men  are  interested  in  producing  goods 
or  services  which  have  value  or  which  in  the  usual  course 
of  events  can  be  bought  and  sold  at  a  market  price.  Com- 
modities which  have  value  always  possess  two  characteristics : 
there  is  an  effective  demand  for  them,  and  they  are  not  found 
in  sufficient  abundance  to  satisfy  all  desire  for  them.  An 
effective  demand  is  demand  supported  by  purchasing  power. 
Briefly  stated,  valuable  commodities  possess  utility  or  the 
power  to  satisfy  human  wants,  and  they  are  scarce.  Com- 
modities which  persons  desire  but  which  are  plentiful  in 
amount  are  free  goods.  Air,  under  ordinary  conditions,  is 
a  free  good.  Business  men  are  not  concerned  with  the 
production  of  free  goods.  Water  in  the  form  of  rain  is  a 
free  good;  but  water  passing  through  irrigation  ditches  in 
the  arid  regions  is  scarce.     It  possesses  value. 

The  problems  of  economics  relate  to  questions  of  value. 
It  has  been  stated  that  the  business  man  is  interested  in 
the  production  of  values  rather  than  in  the  production  of 
goods.  Yet  ultimately  the  important  matter  from  the 
point  of  view  of  human  good  or  social  welfare  is  the  pro- 
duction of  goods  and  services  instead  of  the  creation  of 
values.  Here  is  uncovered  a  fundamental  cause  of  an- 
tagonism.  between  the  aims  of  the  business  world  and  the 
demands  of  men  and  women  as  consumers  of  commodities. 
It  is  a  matter  of  common  knowledge  that  the  total  money 
value  of  the  wheat  crop  of  the  nation  in  a  year  of  small 
crops  may  be  greater  than  in  a  year  of  abundant  harvests. 
The  monopolist  usually  restricts  his  output  of  the  monopo- 
lized article  in  order  that  the  price  of  each  unit  may  be 
enhanced  and  his  total  profits  increased.     But  the  interests 


40  ELEMENTARY   ECONOMICS 

of  the  monopolist  and  those  of  the  consumer  are  by  no  means 
harmonious.  The  consumer  wishes  abundant  harvests  and 
a  plentiful  supply  of  the  products  of  farms,  mines,  and 
manufactories.  Value  signifies  scarcity;  but  scarcity  is 
the  bane  of  the  consumer.  In  a  time  of  national  stress 
such  as  the  United  States  faced  in  1917,  speculators  found 
it  to  their  advantage  to  allow  carloads  of  potatoes  to  freeze 
or  go  to  waste  in  some  other  manner;  but  the  people  of 
the  nation  were  able  clearly  to  see  in  that  emergency  that 
such  business  methods  were  inimical  to  the  welfare  of  a  world 
needing  foodstuffs. 

While  it  is  true  that  business  is  carried  on  to  satisfy  human 
wants,  it  is  also  true  that  the  prime  object  of  the  individual 
business  man  is  to  earn  a  living  for  himself  and  family, 
that  is,  to  make  profits.  But  profits  can  only  be  made  in 
the  business  world  by  supplying  something  which  men  want 
and  are  able  to  purchase.  If  the  production  of  a  small  quan- 
tity of  a  given  commodity  will  result  in  larger  profits  than 
the  production  of  a  large  quantity  of  the  same  article,  the 
business  man  will  unhesitatingly  choose  the  former  course. 
He  considers  himself  to  be  a  business  man,  not  a  philan- 
thropist. His  primary  concern  is  for  himself  and  his 
family  rather  than  the  welfare  of  that  indefinite  mass  called 
the  general  public.  It  is  this  socially  unfortunate  situation 
which  has  led  to  the  passage  of  laws  regulating  railways 
and  other  industries,  of  pure  food  laws  and  regulations  in 
regard  to  weights  and  measures.  These  laws  and  regula- 
tions aim  to  mitigate  the  evils  arising  because  of  the  antag- 
onism between  profit-making  and  commodity-making. 

The  value  of  a  commodity  is  expressed  in  terms  of  another 
commodity.  Two  bushels  of  oats  may  be  equal  in  value 
to  one  of  wheat,  or  a  pound  of  butter  may  exchange  for  one 


WANTS  AND   VALUE  41 

and  one  half  dozens  of  eggs.  We  are  considering  value  in 
exchange;  and  exchange  value  is  always  a  ratio.  If  the 
value  of  one  commodity  in  terms  of  another  goes  up,  the 
value  of  the  second  in  terms  of  the  first  is  lowered.  If  the 
exchange  value  of  oats  for  wheat  changes  from  two  to  one, 
to  three  to  one,  the  value  of  wheat  measured  in  oats  has 
risen  and  the  value  of  oats  in  terms  of  wheat  has  fallen. 

Price.  Price  is  a  form  of  exchange  value.  It  is  the  value 
of  a  commodity  in  terms  of  money,  or  in  this  country  in 
terms  of  gold,  which  is  our  standard  money.  If  wheat  is 
selling  at  a  dollar  a  bushel,  the  exchange  value  of  wheat  in 
terms  of  gold  is  equal  to  the  amount  of  gold  in  a  gold  dollar. 
Market  prices  are,  then,  simply  the  exchange  values  of 
commodities  in  terms  of  one  commodity,  gold,  used  as  money. 
The  price  of  an  article  tends  to  fall  in  a  given  market  when 
the  supply  of  the  article  offered  on  the  market  or  likely  to 
be  offered  increases,  or  when  the  demand  for  the  article 
decreases;  the  price  tends  to  rise  when  reverse  conditions 
obtain.  The  general  level  of  prices  —  the  average  price 
of  all  commodities  —  may  fall  or  rise  as  the  value  of  gold 
rises  or  falls.  In  recent  years,  the  quantity  of  gold  avail- 
able has  rapidly  increased,  —  faster  than  the  demand  for 
gold  —  and  the  value  of  gold  has  fallen.  Or,  in  other  words, 
the  general  level  of  prices  of  commodities  has  risen. 

The  price  of  a  given  commodity,  for  example,  of  a  bushel 
of  potatoes,  cannot,  year  after  year,  fall  below  the  expense 
of  producing  a  bushel  of  potatoes.  If  the  price  should  fall 
below  that  level,  and  remain  below  for  any  considerable 
length  of  time,  many  farmers  would  cease  raising  potatoes. 
The  supply  would  soon  be  reduced  and  presently  the  price 
of  potatoes  would  rise.  On  the  other  hand,  as  the  price  of 
potatoes  rises,  consumers  begin  to  economize  in  their  use 


42  ELEMENTARY   ECONOMICS 

and  substitutes  are  purchased.  As  a  consequence,  the 
demand  for  potatoes  is  somewhat  reduced,  thus  tending 
to  prevent  further  rise  in  price ;  and,  secondly,  farmers  are 
Hkely  to  grow  more  potatoes,  which  in  turn  tends  to  check 
the  rise  in  the  price  of  potatoes.  Price  is  fixed  by  the  de- 
mand and  supply  on  the  market;  but  the  upper  limit  is 
practically  determined  by  the  effective  demand  of  purchasers 
for  the  given  commodity,  and  the  lower  limit  is  fixed,  except 
temporarily,  by  the  expense  of  producing  the  commodity.^ 

TOPICS   FOR   DISCUSSION 

1.  Give  a  list  of  the  wants  of  a  six-year-old  child ;  of  a  man ; 
of  a  woman. 

2.  What  are  some  of  the  things  you  want  because  you  are  not 
living  in  an  isolated  place  ? 

3.  Why  do  you  want  those  articles? 

4.  Could  an  article  have  value  unless  desired  ?     Unless  scarce  ? 

5.  Farmers  sometimes  accept  three  cents  a  quart  for  straw- 
berries. Why  ?  Would  they  continue  to  grow  strawberries  if  they 
never  received  more  ? 

6.  Show  that  all  commodities  are  not  equally  necessary  to  the 
support  of  human  life. 

1  In  this  simple  explanation,  no  account  has  been  taken  of  the  fact  that 
various  producers  have  quite  different  expenses  of  production  and  that  con- 
sumers have  very  different  demanding  power.  Of  course,  the  market  price 
of  an  article  often  temporarily  falls  below  the  expense  of  producing  it. 


CHAPTER  V 
DIRECTION   OF  THE  WORKERS   OF  THE  WORLD 

The  National  Income  Equals  the  Production  of  the  Nation. 
Omitting  from  consideration  such  exceptional  methods  of 
getting  income  or  purchasing  power  as  stealing,  gambling, 
or  accepting  gifts,  —  and  these  three  methods  of  getting 
an  income  spell  subtraction  from  the  income  of  some  other 
person,  —  personal  incomes  may  be  classified  under  four 
headings:  wages,  interest,  rent,  and  profits.  It  is  not 
desirable  in  an  elementary  textbook  to  give  place  to  a  dis- 
cussion of  the  many  theories  which  have  been  advanced 
in  regard  to  wages,  interest,  rent,  and  profits ;  but  some 
attention  will  be  paid  to  certain  practical  considerations 
which  determine  the  magnitude  of  these  shares  in  the 
national  wealth. 

The  total  amount  of  the  four  forms  of  income  plus  the 
net  income  from  businesses  such  as  the  post  office  and 
municipal  plants,  operated  by  the  governmental  units,  equals 
the  entire  income  of  the  community  or  of  the  nation.^  It 
also  is  equal  to  the  entire  production  of  the  community  or 
of  the  nation,  less  an  allowance  for  wear  and  tear  upon  the 
machinery  and  equipment  used  in  business,  called  depre- 
ciation. A  great  exchange  takes  place  in  our  market  places. 
The  people  of  the  United  States  produce  in  a  given  year  a 

^  The  expenditures  of  our  governmental  units  are  chiefly  derived  by 
means  of  taxation,  but  taxes  are  deducted  from  the  income  of  individuals. 
See  Chapter  XXII. 

43 


44  ELEMENTARY   ECONOMICS 

vast  amount  of  grain,  coal,  clothing,  lumber,  brick,  pianos, 
jewelry  and  so  on  through  a  very  long  list.  These  com- 
modities have  market  prices;  and  we  may  calculate  the 
entire  money  value  of  everything  that  is  produced  within 
our  national  boundaries.  Disregarding  foreign  trade  and 
investments  abroad  and  the  like,  this  total  is  also  equal  to 
the  money  value  of  wages,  rent,  interest,  and  profits.  In 
order  to  make  this  point  clear,  let  us  center  our  attention 
upon  one  factory.  The  total  annual  income  —  the  gross 
receipts  —  is  equal  to  the  sale  price  of  everything  produced 
within  the  factory  during  the  year.  After  deducting  the 
expense  for  raw  materials,  insurance,  and  the  expenditure 
for  repairs  and  depreciation  of  the  plant,  the  remainder  may 
be  called  the  net  product  of  the  plant,  considered  as  a  unit. 
This  net  product  will  be  divided  among  four  different  groups 
of  persons :  the  wageworkers  in  the  plant,  the  owners  of 
the  capital  employed,  tKe^owners  oTthe  land  upon  which 
~tEe  plant  stands,  aiidThe^anagers  oFthe  Eusjness^  That  is, 
the  total  net  product,  or  more  accurately  the  money  value 
of  the  net  product,  will  be  divided  into  wages,  interest,  rent, 
and  profits.  Of  course,  one  individual  may  receive  income 
from  more  than  one  of  these  four  sources  of  income.  For 
example,  the  owner  of  capital  —  a  bondholder  —  may  also 
be  the  manager  of  the  plant.  What  holds  good  for  one 
plant  is  also  true  of  many  and  of  the  nation  considered  as  a 
unit.  If  the  manager  of  a  manufacturing  enterprise  is  able 
to  increase  through  more  efficient  methods  the  total  pro- 
duction of  the  factory,  the  total  amount  to  be  distributed  as 
wages,  interest,  rent,  and  profits  will,  therefore,  be  increased. 
Likewise,  the  total  production  of  the  nation  may  be  in- 
creased and  the  sum  total  of  wages,  interest,  rent,  and 
profits  paid  within  the  nation  increased  in  the  same  ratio. 


DIRECTION  OF  THE  WORKERS  OF  THE  WORLD     45 

The  student  may,  perhaps,  get  sl  better  understanding  of 
the  situation  if  a  small  isolated  island  peopled  with,  say, 
one  hundred  persons,  be  carefully  studied.  Whatever  holds 
good  on  the  small  island  also  is  true  in  the  bigger  world. 
If  one  half  of  the  people  on  the  island  are  idlers,  the  total 
production  is  reduced  below  the  normal  amount,  and  the 
total  to  be  distributed  in  wages,  interest,  rent,  and  profits 
will  be  reduced.  Poverty  will  be  the  lot  of  many.  Idlers 
and  useless  workers  are  likewise  undesirable  in  the  larger 
world  in  which  we  live.  To  hire  men,  paying  good  wages, 
to  carry  stones  across  a  road  and  then  back  again  is  foolish 
and  wasteful  when  streets  might  be  paved  by  utilizing  the 
labor  power  of  the  same  group  of  workers. 

The  Consumer  and  Business  Enterprise.  Every  person 
who  makes  a  purchase  helps  to  decide  what  the  workingmen 
of  the  country  will  produce.  When  you  decide  to  buy  a 
pair  of  gloves  with  your  two  dollars  instead  of  a  pair  of 
skates,  you  help  to  determine  how  many  workers  shall  be 
employed  in  glove-making  and  how  many  in  skate-making. 
Your  money  measures  your  purchasing  power;  and  in- 
dividuals possessing  purchasing  power  determine  what  shall 
be  used.  If  many  men  buy  beer  or  cigars,  instead  of  neck- 
ties or  shoes,  business  managers  will  hire  more  men  and 
obtain  more  capital  to  produce  beer  and  cigars,  and  a  smaller 
number  of  men  and  less  capital  will  be  employed  to  manu- 
facture neckties  and  shoes.  As  has  been  pointed  out,  in- 
dustry is  primarily  carried  on  to  produce  the  commodities 
and  services  which  men  and  women  with  purchasing  power 
want. 

The  enterpriser  or  the  manager  of  a  business  organiza- 
tion actually  makes  the  decision  in  regard  to  how  many 
units  of  a  given  article  shall  be  produced  per  week  in  the 


46  ELEMENTARY   ECONOMICS 

plant;  he  also  determines  in  what  manner  it  shall  be  pro- 
duced. However,  the  decision  made  by  the  enterpriser  is 
in  turn  dependent  upon  the  demands  of  the  consuming 
public.  If  the  enterpriser  persists  in  manufacturing  an 
article  or  a  particular  variety  of  article  which  the  consumer 
no  longer,  for  some  good  or  some  inadequate  reason,  wishes 
to  purchase,  his  business  will  cease  to  be  profitable.  Ad- 
vertising and  soliciting  are  methods  of  inducing  the  consumer 
to  use  certain  products.  The  consumer  ultimately  deter- 
mines the  course  of  productive  activity;  but  the  consumer 
may  be  "  educated  ''  by  skillful  salesmanship.  The  judicious 
advertising  of  certain  breakfast  foods,  kodaks,  and  motor 
cars  is  indicative  of  the  importance  to  manufacturers  of 
appealing  to  the  consuming  public.  The  politician  and  the 
salesman  are  both  looking  for  votes:  the  former  for  a 
given  man  or  group  of  men  to  be  delivered  at  the  ballot  box ; 
the  latter  for  a  given  product,  the  vote  to  be  delivered  over 
the  counter  of  the  salesroom,  the  grocery  store,  or  the  meat 
market. 

Savings.  Saving  is  merely  directing  the  workers  of  the 
world  to  produce  capital  goods  —  tools,  machines,  loco- 
motives, factory  buildings,  etc.,  —  instead  of  those  consum- 
able goods  which  we  eat  or  wear  or  use  up  in  some  direct 
fashion.  When  savings  are  referred  to,  money  savings  are 
usually  in  mind.  But  money  is  not  "  saved  "  except  by 
the  miser  who  buries  coin  in  the  ground  or  hides  it  under 
the  carpet.  The  person  who  puts  his  savings  in  a  savings 
bank  does  not  actually  "  save  money."  Much  fallacious 
reasoning  may  be  found  in  this  connection.  If  we  try  to 
understand  what  actually  happens,  it  is  not,  however, 
difficult  to  see  what  saving  really  is. 

When  savings  are  placed  in  a  savings  bank  the  depositor 


DIRECTION  OF  THE  WORKERS  OF  THE  WORLD     47 

decides  not  to  spend  all  of  his  income  on  food,  clothing, 
shelter,  and  recreation,  that  is,  for  consumable  goods  and 
services.  Because  he  can  get  an  additional  return  at  the 
end  of  the  year  —  interest  —  for  his  savings,  he  decides  to 
place  them  in  the  bank.  But  savings  are  purchasing  power. 
The  bank  again  loans  these  savings  or  this  purchasing  power 
to  some  enterpriser,  to  an  individual  or  company  engaged 
in  business.  The  enterpriser  uses  this  purchasing  power, 
not  to  buy  food  or  clothing  or  shelter,  but  to  purchase  tools, 
machinery  or  a  factory  building.  A  farmer  may  build 
fences  or  a  barn  as  a  consequence  of  saving.  A  portion  of 
the  money  income  which  he  receives  from  the  sale  of  his 
farm  products  —  wheat,  corn,  potatoes,  etc.,  —  is  used  to 
buy  lumber,  other  building  material,  and  labor.  Again,  in 
this  case,  saving  merely  changes  the  direction  of  the  pro- 
ductive effort  of  business  enterprise  from  consumable  goods 
to  capital  goods.  The  maintenance  and  the  increase  of 
the  capital  goods  of  a  nation  are  results  of  saving. 

Savings  mean  the  employment  of  more  workers  in  pro- 
ducing capital  goods  —  tools,  machines,  railways,  and  the 
like  —  and  less  in  producing  consumption  goods  —  candy, 
food,  luxuries,  etc.  Saving  changes  the  direction  of  world's 
workers  into  new  channels.  Savings,  except  for  the  miser, 
are  not  stored-up  money  or  other  articles.  (^From  another 
point  of  view,  saving  is  a  transfer  of  the  ri^ht  to  pnrphasft, 
to  some  other_individual  or  company  for  a  return  called, 
jnterestil — 

Luxury  and  Waste.  Wasteful  consumption  causes  the 
misdirection  of  the  activities  of  the  workers  of  the  world. 
It  means  that  woi^kers  are  directed  to  produce  luxuries  for 
ostentatious  display  or  to  satisfy  the  whims  of  certain 
individuals   possessing   purchasing   power.     Wasteful    con- 


48  ELEMENTARY   ECONOMICS 

.      / 

sumption  causes  a  reduction  in  the  amount  of  necessities, 

of  comforts  and  of  capital  produced.  Purchasing  power  to 
the  extent,  perhaps,  of  a  bilhon  or  more  dollars  per  year 
has  been  wasted  in  the  United  States  alone  on  *'  luxury, 
show,  and  vice."  Such  useless  waste  is  one  of  the  reasons 
for  poverty  and  for  the  large  mass  of  ill-to-do  in  this  great 
*  prosperous  "  nation. 

If  a  flood  destroys  bridges  and  houses,  it  will  be  necessary 
to  employ  men  and  utilize  materials  to  replace  the  destroyed 
structures.  Of  course  better  houses  and  better  bridges  may 
replace  those  carried  away  by  the  water;  but,  if  there  has 
been  no  destructive  flood,  the  materials  and  the  work  of 
the  men  might  have  been  used  to  build  other  and  additional 
buildings,  to  pave  streets  or  construct  railways.  And,  as 
a  result,  the  community  would  be  better  equipped.  From 
this  broad  social  or  national  point  of  view  which  looks  upon 
the  community  or  the  nation  as  an  owner  would  upon  his 
plantation  or  his  factory,  destruction  of  property  by  fire, 
flood,  or  tornado  is  not  to  be  desired.  But  from  the  point 
of  view  of  certain  business  men  in  the  community,  it  may 
be  called  a  blessing.  The  merchant  who  sells  window  glass 
may  find  his  profits  enhanced  by  a  severe  hailstorm ;  and 
the  plumber  may  have  extra  work  because  of  an  unusually 
cold  snap.  War,  the  most  destructive  of  all  world  calamities, 
makes  huge  profits  for  the  manufacturer  of  munitions.  Here 
again  social  welfare  and  individual  or  special  interests  run 
counter  to  each  other.  The  liquor  interests,  for  example, 
insist  upon  their  right  to  do  business  even  though  it  has 
been  conclusively  proven  that  the  consumption  of  liquor 
is  inimical  to  social  welfare  and  national  efficiency. 

Expenditures  for  luxuries  are  often  justified  by  the  argu- 
ment that  such  demands  make  work  for  many  wageworkers 


DIRECTION   OF  THE  WORKERS  OF  THE  WORLD     49 

who  otherwise  would  be  idle.  This  ''  make  work  "  doctrine 
has  been  so  generally  accepted  and  so  persistently  put  forth 
that  it  is  worth  while  to  consider  the  matter  briefly.  If 
workers  are  set  to  producing  orchids,  they  cannot  grow 
potatoes  or  wheat.  If  hundreds  of  wage  earners  are  foot- 
men and  valets,  these  workers  cannot  be  used  to  make  cloth- 
ing, shoes,  foodstuffs,  or  houses.  Another  reference  to  the 
small  island  may  make  the  problem  clearer.  If  a  large 
fraction  of  the  total  number  of  workers  on  the  island  are 
engaged  in  producing  luxuries,  the  amount  of  necessities 
and  comforts  produced  must  be  necessarily  reduced  below 
the  amount  which  might  be  anticipated  if  a  smaller  number 
were  workers  of  this  type.  Indeed,  a  condition  might  easily  be 
reached  in  which  the  majority  of  the  islanders  were  in  abject 
poverty  while  a  few  rich  were  being  surfeited  with  luxuries. 

The  exigencies  of  the  great  war  into  which  the  United 
States  was  forced  in  1917  soon  taught  the  American  people 
that  many  forms  of  expenditures  must  be  curtailed  in  order 
that  munitions,  ships,  aeroplanes,  and  food  might  be  pro- 
duced in  sufficient  quantities  to  insure  success  in  the  great 
struggle.  But,  it  is  also  true  in  times  of  peace,  that  ex- 
cessive expenditures  for  luxuries  may  mean  a  deficient 
production  of  necessities  and  comforts.  The  community, 
the  city,  the  nation,  or  the  generation  which  devotes  a  large 
share  of  its  energy  to  satisfying  cravings  for  fine  clothing, 
costly  food,  cabarets,  theaters,  and  expensive  jewelry  must 
go  without  the  fine  architecture,  good  roads,  great  libraries, 
and  art  galleries  which  would  be  available  for  a  more  frugal 
people  with  less  expensive  tastes  and  who  placed  less  empha- 
sis upon  purely  personal  and  fleeting  pleasures. 

Individuals  engaged  in  the  business  of  producing  luxuries 
will  suffer  temporarily  when  a  sudden  curtailment  of  such 


50  ELEMENTARY   ECONOMICS 

expenditures  occurs.  The  entrance  of  the  United  States 
into  the  war  adversely  affected  the  jewelry  business;  but, 
in  the  long  run,  workers  in  a  declining  industry  will  go  into 
other  lines  of  work.  The  florists  and  theii*  assistants  might 
readily  become  market  gardeners.  The  makers  of  very 
expensive  garments  could  without  great  difficulty  produce 
cheaper  grades  of  clothes.  As  long  as  there  is  a  scarcity  of 
necessities,  curtailment  of  expenditures  for  luxuries  can  be 
justified.  However,  some  expenditures  for  things  of  beauty 
and  refinement  are  doubtless  desirable  and  make  for  human 
progress.  The  evil  lies  in  excessive  or  conspicuous  waste  or 
luxury.  The  whole  problem  finally  reduces  to  one  of  di- 
rection of  the  energy  of  the  world's  workers. 

The  Rights  and  Duties  of  the  Consumer.  Business  prin- 
ciples in  regard  to  the  advertising  and  selling  of  wares  are 
changing.  The  old  saying,  ''  Let  the  buyer  beware  "  was 
founded  upon  the  idea  that  the  misrepresentation  of  goods 
to  the  purchaser  was  good  business.  The  coming  of  the 
carton,  the  use  of  the  original  package  unopened  from  manu- 
facturer to  consumer,  and  the  one-price,  money-back-if- 
you-are-not-satisfied  method  of  selling  goods,  are  transform- 
ing the  making  and  selling  of  goods  into  something  more 
desirable  and  honorable  than  a  method  of  fleecing  customers. 
The  rights  of  the  consumer  are  further  safeguarded  by  pure- 
food  laws  and  the  like.  Both  the  law  and  the  new  theory 
of  business  operate  to  protect  the  ultimate  consumer,  — 
and,  since  all  are  consumers,  to  protect  the  community. 

Much  has  been  written  and  spoken  about  the  rights  of 
the  general  public  —  the  great  third  party  —  in  disputes 
between  workingmen  and  their  employers;  but  very  little 
has  been  said  about  the  duties  of  the  general  public  as  con- 
sumers who  make  up  the  public.     It  is  time  for  an  analysis 


DIRECTION   OF  THE  WORKERS  OF  THE  WORLD     51 

of  the  duty  of  the  consumer.  What  may  he  be  allowed  to 
do  with  his  purchasing  power  ?  Is  it  in  the  interest  of  social 
welfare  and  human  betterment  that  each  and  every  person 
possessing  purchasing  power  do  with  it  exactly  as  he  desires  ? 
Now,  as  has  been  indicated,  upon  the  direction  of  the  pur- 
chasing power  of  the  people  depends  the  kind  and  quality 
of  the  output  of  the  nation.  If  consumers  are  anxious  to 
purchase  large  quantities  of  useless  and  harmful  products, 
many  workers  and  business  establishments  will  cater  to  the 
demand.  The  spendthrift,  the  beer  drinker,  and  the  person 
who  eats  much  meat  are  expensive  persons  to  maintain.  A 
person  can  be  well  fed  at  less  social  or  national  cost  upon 
cereals  and  vegetables.  Scientific  selection  of  consumable 
goods  is  as  important  in  national  economy  as  efficient  man- 
agement of  labor  and  capital. 

Society  is  beginning  to  curb  the  enterpriser.  He  is  re- 
stricted in  a  variety  of  ways  by  anti-trust  laws,  by  labor 
legislation,  by  governmental  regulation  as  of  railways,  and 
by  other  means.  Society  also  restrains  the  workers.  Laws 
have  been  placed  upon  the  statute  books  in  regard  to  strikes, 
boycotts,  injunctions,  arbitration  and  conciliation,  social 
insurance,  apprenticeship  in  certain  trades.  But  the  con- 
sumer, except  as  a  war  measure,  has  been  subject  to  very 
little  legal  control.  Laws  have  been  passed  in  regard  to 
the  consumption  of  intoxicating  beverages  and  certain 
drugs;  but  beyond  this  short  step  little  has  been  accom- 
plished. Nevertheless,  the  misdirection  of  consumption 
causes  serious  individual  and  social  maladjustments.  If  the 
American  nation  can  curb  a  large  trust,  why  can  it  not  re- 
strain the  consumer  who  insists  upon  furnishing  banquets 
to  guests  at  a  cost  of  $100  per  plate,  in  a  city  filled  with  the 
victims  of  poverty  and  under-nourishment  ? 


52  ELEMENTARY   ECONOMICS 

The  passage  of  graduated  income  and  inheritance  tax  laws 
is  a  movement  in  the  direction  of  curbing  the  consumer. 
By  taking  a  portion  of  a  citizen's  income  or  inheritance, 
the  government,  representing  society,  the  general  public, 
or  the  nation,  directs  the  purchasing  power  which  otherwise 
would  have  been  a  matter  of  individual  decision. 

Thus  far  only  the  total  output  of  the  nation  has  been 
considered.  Now,  the  next  problem  is  to  analyze  the 
division  of  the  total  income  into  the  four  factors :  wages, 
interest,  rent,  and  profits.  With  a  given  state  of  produc- 
tion, that  is,  with  a  certain  amount  produced  in  a  year, 
what  determines  how  much  should  go  as  wages,  how  much 
as  interest,  how  much  as  rent,  and  how  much  as  profits? 
This  problem  of  distribution  is  perhaps  the  most  difficult 
and  vital  of  all  economic  questions. 

TOPICS   FOR   DISCUSSION 

1.   What  are  some  of  the  articles  widely  advertised? 
r     2.    Distinguish  between  necessities  and  luxuries. 

3.  Is  the  miser  or  the  spendthrift  the  more  desirable  member  of 
society? 

4.  When  you  make  a  deposit  in  a  savings  bank,  do  you  ajffect 
in  any  way  business  operations  ? 


CHAPTER  VI 
SHARES   IN   THE   NATIONAL   INCOME 

Wages.  Wages  are  the  price  paid  for  labor ;  salary  is  one 
form  of  wages.  In  economics  the  term  "  labor  "  includes  all 
forms  of  human  effort  in  the  production  of  goods  and  services 
demanded  by  human  beings.  Labor  includes  the  efforts  of 
the  unskilled  toiler,  the  work  of  the  trained  physician  or  of 
the  teacher,  and  the  services  of  the  bank  president  or  the 
railway  manager.  The  wage  rate  is  actually  fixed  by  means 
of  a  bargain  between  the  worker  and  his  employer.  Labor 
is  bargained  for  much  the  same  as  is  sugar  or  steel.  As  is 
true  of  commodities,  the  wage  rate  tends  to  rise  when  the 
number  of  workers  decreases  or  the  demand  for  workers 
increases;  and  the  wage  rate  tends  downward  when  the 
number  of  workers  increases  or  the  demand  for  workers 
decreases.  But  labor  power  differs  in  certain  important 
respects  from  an  ordinary  article  of  merchandise.  The 
worker  must  go  with  his  labor  power ;  labor  power  can  be 
exercised  only  in  connection  with  the  body  of  the  worker. 
Shop  conditions  vitally  concern  the  seller  of  labor  power,  — 
the  wageworker.  The  worker  must  also  live  near  his  work ; 
the  sale  of  his  labor  power  determines  where  he  and  his 
family  must  live  as  well  as  who  his  companions  shall  be  during 
working  hours.  Again,  labor  power  is  a  highly  perishable 
commodity.  To-day's  labor  power  cannot  be  sold  to- 
morrow ;    it  must  be  sold  to-day  or  it  is  wasted. 

The  rate  of  wages  paid  varies  greatly.  At  the  bottom  of 
the  scale  is  the  sweat-shop  worker  who  receives  a  pittance 

53 


54  ELEMENTARY   ECONOMICS 

of  five  or  six  dollars  a  week;  at  the  top  of  the  list  will  be 
found  the  captain  of  industry  receiving  a  salary  of  $1 00,000 
or  more  per  year.  The  workers  of  the  nation  may  be  roughly 
classified  into  four  somewhat  distinct  groups,  —  the  un- 
skilled, the  skilled,  the  professional  and  highly  skilled  workers, 
and  the  industrial  leaders  or  captains  of  industry.  Each 
one  of  these  large  groups  could  be  subdivided  into  several 
smaller  groups.  By  far  the  larger  number  are  found  in  the 
first  group,  and  the  unskilled  receive  the  lowest  wage.  The 
fourth  group  consists  of  a  relatively  small  number  of  highly 
paid  workers.  Between  these  groups,  and,  indeed,  between 
subdivisions  within  a  group,  there  is  very  little  competition. 
The  wage  rate  for  each  group  is  fixed  in  a  large  degree  with- 
out reference  to  the  rates  paid  for  workers  in  other  groups. 

Individual  Bargaining.  There  are  two  kinds  of  wage 
bargains,  individual  and  collective.  When  each  worker, 
acting  independently  of  his  fellow  workers,  applies  for  work 
and  agrees  with  his  employer  as  to  rates  of  wages  and  the 
conditions  under  which  the  former  shall  work,  individual 
bargaining  is  utilized.  Nearly  all  bargaining  between 
workers  in  the  professional  group  or  in  the  upper  working 
group  is  individual.  The  average  worker  of  the  unskilled 
or  of  the  skilled  groups  is  usually  at  a  great  disadvantage 
when  he  bargains  individually  with  an  employer  of  many 
workers.  The  seeker  for  employment  cannot  afford  to  lie 
idle;  his  family  expenses  continue  while  he  is  out  of  a  job. 
The  matter  is  of  much  importance,  as  a  rule,  to  the  worker, 
of  greater  importance  than  it  is  to  the  manager  of  the  business 
needing  another  employee.  To  the  latter,  it  is  merely  a 
question  of  one  more  or  one  less  employee  and  a  slight 
difference  in  profits.  The  employer  of  many  workers  is 
more  skilled  in  bargaining  than  the  worker ;  and  the  former 


SHARES   IN   THE  NATIONAL  INCOME  55 

is  usually  well  informed  as  to  the  labor  market.  Other 
workers  can  readily  be  found  in  normal  times  to  do  the 
routine  work  of  the  unskilled  laborer.  The  skilled  worker 
is  in  a  less  disadvantageous  position;  it  is  more  difficult 
and  costly  to  fill  his  position. 

In  reality,  the  individual  bargain  made  with  the  lower 
paid  workers  is  a  one-sided  matter.  The  employer  tells  the 
seeker  for  work  that  he  is  paying  so  much  for  the  kind  of 
labor  in  question.  The  wageworker  can  take  the  wage 
offered  or  he  can  look  further.  Of  course,  if  the  employer 
finds  it  impossible  to  get  all  the  workers  he  needs,  the  wage 
rate  may  presently  be  raised;  although  employers  are  very 
loath  to  raise  the  level  of  wages.  But  the  essentials  of  a 
real  bargain  are  chiefly  conspicuous  by  their  absence  when 
an  individual  unskilled  worker  confronts  the  typical  employer 
of  labor. 

Collective  Bargaining.  One  of  the  chief  objects  of  organ- 
ized labor  is  the  substitution  of  collective  for  individual 
bargaining.  In  collective  bargaining  a  representative  of  a 
group  of  workers  bargains  with  the  employer.  The  wages 
of  the  entire  group  are  determined  as  the  result  of  one 
bargain.  In  collective  bargaining,  the  two  parties  stand 
much  more  nearly  on  a  plane  of  equality  than  when  the 
single  worker  meets  his  employer.  The  labor  representative 
is  usually  a  capable  man  who  has  had  experience  in  the  labor 
market;  he  is  acquainted  with  the  facts  as  to  demand  and 
supply.  A  failure  to  reach  an  acceptable  agreement  is  a 
much  more  serious  matter  to  the  employer  than  in  individual 
bargaining.  The  failure  to  make  a  bargain  may  result  in  a 
strike  closing  temporarily  his  shop,  factory,  or  mine. 

Many  employers  refuse  to  bargain  collectively  with  their 
employees.     Various  reasons  are  offered  for  such  refusal. 


56  ELEMENTARY   ECONOMICS 

but  the  real  reason  is  usually  found  in  the  fact  that  collective 
bargaining  results  in  higher  average  wages  and  better  work- 
ing conditions  than  individual  bargaining.  Of  course,  ex- 
ceptions to  this  statement  can  readily  be  found ;  but  it  is 
true  if  many  factories  or  mines  are  taken  under  consideration. 
For  the  manager  of  a  corporation  to  refuse  to  bargain  with 
representatives  of  organized  labor  is  peculiarly  illogical 
because  the  manager  is  himself  the  representative  of  the 
organized  stockholders  of  the  corporation. 

In  several  industries  in  this  country,  collective  bargaining 
is  the  rule,  —  for  example,  coal  mining,  stove  making,  print- 
ing, railroading.  The  biggest  labor  market  in  the  world 
is  found  in  the  American  coal  mining  industry.  Wages, 
hours  of  .labor,  and  other  conditions  in  the  industry  are 
determined  from  time  to  time  by  collective  bargaining  be- 
tween representatives  of  the  United  Mine  Workers  and  the 
coal  mine  operators.  These  representatives  meet,  bluff, 
higgle,  and  bargain.  The  alternative  is  a  strike ;  but  strikes 
are  rare  in  the  mines  in  which  the  miners  are  organized. 
The  system  of  collective  bargaining  is  called  the  trade  agree- 
ment system.  Trade  agreements  can  best  be  carried  out 
when  both  sides  are  well  organized  and  of  almost  equal 
strength.  Wage  bargains  in  the  case  of  workers  in  the  third 
and  fourth  groups  are  almost  invariably  individual;  but 
little  or  no  hardship  is  experienced  by  these  well-trained 
professional  workers  and  managers  of  industrial  enterprises. 
I  Arbitration.  The  differences  between  employers  and  their 
employees  in  regard  to  wages  and  other  matters  pertaining 
to  the  labor  contract  cannot  always  be  settled  by  bargain- 
ing. In  such  an  event  the  workers  may  quit  work  col- 
lectively; or  the  employer  may  close  his  establishment  to 
his  workers.     The  former  is  called  a  strike;   the  latter,  a 


SHARES   IN   THE   NATIONAL   INCOME  57 

lockout.  In  the  days  of  small-scale  industry,  a  strike  or  a 
lockout  affected  outsiders  very  little;  only  those  directly 
concerned  were  much  inconvenienced.  But  to-day  a 
strike  in  any  large-scale  industry  is  a  matter  in  which  the 
people  of  the  nation  or  at  least  of  the  immediate  locality 
are  vitally  concerned.  A  railway  or  coal  mining  strike  will 
tie  up  the  industries  of  the  nation  and  soon  starve  or  freeze 
many  families  who  are  not  directly  interested  in  railroading 
or  coal  mining.  The  great  "  third  party/'  or  the  general 
public,  often  feels  that  employers  and  employees  ought  not 
to  be  allowed  to  fight  out  their  differences  to  the  detriment 
of  the  innocent  bystanders.  As  a  consequence,  a  demand 
has  become  articulate  that  some  method,  other  than  the 
crude  one  of  the  strike,  be  used  to  settle  labor  disputes  in 
large-scale  industries  and  particularly  in  industries  such  as 
railways  and  municipal  utilities. 

Arbitration  is  an  orderly  scheme  for  fixing  wages  and  de- 
termining other  items  in  the  wage  contract.  A  board, 
usually  composed  of  three  persons,  is  selected  to  make  a 
determination.  This  board  may  be  composed  of  one  person 
representing  the  employer,  one  representing  the  employees, 
and  the  third  representing  the  public.  The  third  person 
is  supposed  to  be  neutral;  he  is  in  reality  as  a  rule  the 
umpire  or  actual  arbitrator.  This  board  acts  as  a  sort  of 
court.  Both  sides  present  their  case ;  and  the  board  after 
careful  consideration  renders  a  decision.  If  arbitration  be 
compulsory  as  in  certain  Australasian  states,  both  parties 
are  obliged  under  penalty  to  accept  the  decision.  In  the 
United  States,  certain  states,  and  the  federal  government 
in  the  case  of  interstate  railways,  make  provision  for  volun- 
tary arbitration  of  labor  disputes.  The  parties  concerned 
may  refer  the  difficulty  to  a  board  of  arbitration.     A  recent 


58  ELEMENTARY   ECONOMICS 

decision  of  the  United  States  Supreme  Court  indicated  that 
compulsory  arbitration  was  legal  and  desirable  in  the  case 
of  interstate  railways. 

The  advantages  of  the  arbitration  process  may  easily  be 
discerned.  The  strike  with  all  its  violence,  suffering,  and 
hatred  is  eliminated.  But  the  difficulties  attending  this 
method  of  settling  labor  disputes  are  many.  If  the  con- 
troversy is  over  the  rate  of  wages,  the  court  can  find  no  scien- 
tific method  of  determining  what  is  a  fair  day's  wage.  No 
student  of  economics  or  of  labor  problems  has  been  able  to 
bring  forth  a  yardstick  for  the  determination  of  the  rate 
of  wages  which  both  sides  to  the  controversy  are  willing  to 
accept.  The  consequence  of  this  unfortunate  state  of  affairs 
is  that  a  board  of  arbitration  fixes  wages  by  some  rule-of- 
thumb  plan,  —  what  wages  have  been  in  that  industry,  what 
wages  are  elsewhere,  or  with  reference  to  the  cost  of  living. 
The  findings  of  a  board  of  arbitration  are  always  in  the 
nature  of  a  makeshift  or  a  compromise.  The  board  patches 
up  the  difficulties,  and  the  industry  proceeds  without  the 
shock  of  a  strike.  But,  unfortunately,  the  seeds  of  further 
difficulty  are  in  evidence.  When  hours  of  labor  instead  of 
wages  are  to  be  determined  by  the  board,  the  difficulty  is 
not  so  considerable.  It  is  possible  to  determine  with  some 
degree  of  accuracy  what  is  a  "  fair  working  day."  However, 
when  the  issue  is  the  recognition  of  the  union  or  the  matter 
of  open  or  closed  shop,  the  board  has  no  adequate  rule  or 
scientific  principle  to  guide  it. 

Minimum  Wage.  Another  method  of  modifying  the  con- 
ditions of  the  wage  bargain  is  minimum  wage  legislation. 
A  minimum  wage  law  does  not  determine  the  wage  rate; 
it  merely  fixes  a  lower  limit.  Competition  or  monopoly, 
as  the  case  may  be,  is  only  interfered  with  in  so  far  as  the 


SHARES   IN   THE  NATIONAL   INCOME  59 

employers  are  prevented  from  depressing  the  rate  of  wages 
below  the  legal  minimum.  This  minimum  is  usually  de- 
termined by  ascertaining,  as  accurately  as  may  be,  the 
lowest  possible  cost  of  living  of  the  workers  under  considera- 
tion. Such  legislation  has  for  its  aim  the  protection  of  un- 
organized and  unskilled  workers  who  are  forced  by  economic 
necessity  to  accept,  unless  protected  by  law,  wages  too  low 
to  enable  them  to  maintain  physical  efficiency.  In  the 
United  States,  the  state  laws  apply  only  to  women  and 
children.^  A  minimum  wage  law  may  be  compared  with 
laws  fixing  minimum  sanitary  conditions  or  minimum  con- 
ditions of  safety.  When  organized  labor  fixes  a  minimum 
wage  for  the  organized  workers  of  a  given  occupation,  the 
minimum  is  always  fixed  higher  than  a  minimum  fixed  by 
legislation  would  be  placed.  Organized  labor  demands  more 
than  a  bare  subsistence  wage. 

Interest.  Interest  is  the  price  paid  for  the  use  of  capital, 
or  for  the  use  of  various  instrumentalities  which  are  the 
product  of  past  effort,  such  as  buildings,  tools,  machines, 
railways,  ships,  and  docks.  It  is  usually  stated  that  interest 
is  paid  for  the  use  of  money  or  credit.  In  the  great  mass  of 
borrowing,  however,  it  is  not  money  or  credit  which  is  wanted 
except  as  a  means  of  obtaining  equipment,  buildings,  or  other 
forms  of  capital.  Interest  can  be  paid  because  a  manu- 
facturing plant,  for  example,  is  able  to  increase  its  production 
by  the  use  of  more  capital.  An  automobile  manufacturing 
company  borrows  money.  With  this  money  or  purchasing 
power,  the  company  buys  additional  machinery.  With  the 
increased  number  of  machines,  the  plant  turns  out  more 
automobiles  per  week.  If  the  manufacturer  has  made  good 
business  calculations,  the  additional  output  resulting  from 

1  For  a  discussion  of  the  legislation,  see  Chapter  XVI. 


60  ELEMENTARY   ECONOMICS 

the  use  of  the  additional  machinery  will  pay  for  the  wear 
and  tear  —  depreciation  —  on  the  new  machines  and  the 
interest  on  the  amount  of  money  borrowed ;  and  a  surplus 
will  be  left  for  additional  profits.  Business  men  are  willing  to 
pay  interest  because  they  expect  to  be  able  to  make  profits 
because  of  the  use  of  the  capital  purchased  with  the  money 
borrowed. 

Interest  is  calculated  at  a  certain  percentage  of  the  money 
borrowed  —  say,  6  per  cent  per  annum.  Actual  or  gross 
interest  rates  differ  greatly.  Money  is  often  loaned  on  ex- 
cellent security  for  3^  to  4  per  cent.  The  Liberty  Loan  of 
the  spring  of  1917  bore  3^  per  cent  interest;  and  the  bonds 
were  tax  free.  Some  ''  gilt-edged  "  railway  bonds  bear  4  per 
cent  interest.  On  the  other  hand,  investments  in  which  the 
uncertainty  or  risk  is  greater  bear  a  higher  rate  of  interest. 
In  reality,  high  interest  rates  are  part  interest  and  in  part 
return  for  risk  taking.  If  an  investment  promises  ten  per 
cent  interest,  it  is  quite  certain  that  a  portion  of  the  ten  per 
cent  should  accurately  be  called  a  return  for  risk  taking ; 
the  investment  is  speculative  or  it  is  not  "  gilt-edged." 

Rent.  Rent  is  the  payment  made  for  the  use  of  land ;  in 
popular  language,  the  return  from  the  use  of  a  factory  build- 
ing, office  building,  or  residence  is  usually  called  rent.  The 
latter  return  should,  however,  be  designated  as  interest. 
Land  furnishes  space  for  all  kinds  of  human  activities,  — 
for  agriculture,  for  transportation  over  roads,  railways,  and 
waterways,  for  manufacture,  for  mining,  for  residences,  for 
recreation  in  parks,  playgrounds,  and  athletic  fields,  for 
school  buildings,  libraries,  and  museums.  Land  provides 
space  for  human  activities  and  for  the  utilization  of  natural 
resources  such  as  climatic  advantages,  water-power,  and 
mineral  wealth.    Rent  arises  because,  first,  there  is  a  scarcity 


SHARES   IN   THE   NATIONAL   INCOME  61 

of  good  —  well-located  —  land ;  and,  secondly,  because  in 
the  utilization  of  land  the  phenomenon  of  diminishing  re- 
turns is  observed.  These  two  causes  of  rent  should  be  care- 
fully studied. 

In  a  city,  the  land  in  the  downtown  section  is  the  most 
expensive ;  the  owner  of  such  land  receives  high  rents.  On 
the  contrary,  land  situated  far  from  the  centers  of  population, 
that  is,  far  from  markets,  bears  no  rent  or  a  very  low  rent. 
Many  persons  wish  to  use  the  first-mentioned  kind  of  land ; 
but  few  desire  to  use  the  second.  Competition  among 
business  men  wishing  to  rent  good  city  land,  forces  up  the 
rental  return.  A  business  man  is  willing  to  pay  more  rent 
for  a  lot  in  the  downtown  district  than  for  one  of  the  same 
area  and  frontage  located  in  the  suburb. 

Let  two  stores  of  the  same  equipment,  size  of  building, 
and  efficiency  of  labor  and  management  be  compared.  One 
located  downtown  will  be  more  easy  of  access  to  the  majority 
of  would-be^  purchasers,  its  market  opportunities  are  better, 
than  another  located  in  the  outskirts  of  the  city.  At  the 
end  of  a  year's  business,  disregarding  payment  for  the  use 
of  land,  the  downtown  store  will  make  more  net  profits  than 
the  other.  The  difference  in  the  profits  —  $1000,  for  ex- 
ample —  cannot  be  attributed  to  capital  or  labor  or  manage- 
ment, because  these  are  by  hypothesis  equal  in  the  two  stores. 
The  difference  must  be  attributed  to  the  greater  desirability 
of  the  location  of  the  downtown  store.  The  additional 
rental  return  which  the  owner  of  that  lot  can  obtain  in  com- 
parison with  the  one  located  far  from  the  center  of  the  city 
is  $1000 ;  and  the  selling  value  of  the  former  is  much  greater 
than  that  of  the  suburban  lot.  The  same  reasoning  applies 
to  two  farms  of  equal  size  and  fertility  and  operated  in 
the  same  manner  and  with  equal  efficiency.     The  one  well 


62  ELEMENTARY   ECONOMICS 

located  will  yield  a  higher  return  or  rent  than  the  other 
located  where  access  to  markets  is  difficult.  Rent  is  a  meas- 
ure of  the  desirability  of  land  or  of  the  superiority  of  one 
plot  of  ground  over  another  in  regard  to  location,  climatic 
conditions,  rainfall,  configuration  of  the  surface,  mineral 
wealth,  etc. 

Land  which  is  poorly  located  or  favored  by  few  climatic 
advantages  may  yield  no  return  over  and  above  wages, 
interest,  and  ordinary  profits.  Such  land  is  designated  as 
no-rent  land.  The  rent  of  all  other  kinds  of  land  may  be 
measured  by  the  advantages  possessed  over  no-rent  land. 
The  competition  of  business  men  for  desirable  plots  of  ground 
will  finally  cause  land  to  be  utilized  for  the  purpose  for  which 
it  is  best  suited.  For  example,  land  in  the  downtown  district 
of  a  great  city  will  not  be  used  for  farming  or  for  market 
gardening;  it  will  be  used  for  store  or  office  buildings. 
Land  near  a  city  may  be  used  for  market  gardening  but  not 
for  wheat  raising.  Land  may  be  sold  for  a  price  because  it 
enables  the  owner  to  receive  a  return  in  the  form  of  rent. 
No-rent  land  is  no-value  land,  —  unless  there  is  a  fair  pros- 
pect that  it  will  become  rent-bearing  in  the  not  distant  future. 

Many  writers  insist  that  rent  is  paid  for  the  fertility  of 
the  soil  as  well  as  for  location.  But,  since  the  soil  wears  out 
or  loses  its  fertility  when  cultivated,  in  a  manner  similar  to 
a  machine,  and  must  be  renewed  by  fertilization,  it  seems 
more  logical  to  call  soil  capital  and  the  return  ascribable  to  it 
interest.  Rent  is  that  which  is  paid  for  location  and  standing 
room  in  the  case  of  both  agricultural  and  urban  lands.  Since 
water  power  and  minerals  are  not  renewable  by  human  ac- 
tivity in  the  way  in  which  capital  is  renewed  or  replaced, 
the  return  ascribable  to  the  control  or  ownership  of  mineral 
wealth  and  water  power  is  also  placed  in  the  category  of  rent. 


SHARES   IN   THE   NATIONAL   INCOME  63 

Diminishing  Returns.  It  has  been  pointed  out  that  labor 
and  capital  employed  upon  land  and  skillfully  directed  by 
an  enterpriser  will  yield  under  normal  conditions  over  and 
above  depreciation  and  cost  of  raw  materials,  wages,  interest, 
rent,  and  profits.^But  it  is  found  in  all  lines  of  business  ac- 
tivity that  as  more  and  more  labor  and  capital  are  utilized 
without  changes  in  the  method  of  application,  on  a  given  ared 
of  land, — for  example,  one  acre, — the  total  return  increases, 
but  after  a  certain  amount  or  number  of  doses  has  been  ap- 
plied the  return  per  unit  of  labor  and  capital  decreases,  — 
diminishing  returns  appear.  On  the  other  hand,  insufficient 
applications  of  labor  and  capital  to  a  given  area  of  ground 
produce  small  returns  per  unit  of  labor  and  capital.  The^ 
law  of  diminishing  returns  in  farming  may  be  illustrated 
by  the  following  example.  The  application  of  one  unit  of 
labor  and  capital  —  so  much  labor,  so  many  horses,  farming 
implements,  and  buildings,  a  certain  amount  of  fertilizer, 
etc.  —  will  produce  on  a  farm  of  160  acres,  4  units  of  prod- 
ucts; the  application  of  2  units  of  labor  and  capital  will 
produce  10  units  of  products;  3  units,  12;  4  units,  14; 
5  units,  15.  In  this  illustration,  increasing  returns  arise 
up  to  the  application  of  two  units  of  labor  and  capital ;  at 
that  point  diminishing  returns  appear.  The  land  is  not 
efficiently  cultivated  by  the  application  of  one  unit;  the 
farmer  would  do  well  to  use  his  labor  and  capital  on  a  smaller 
area  of  land.  Two  applications  return  the  maximum  yield 
per  unit  of  labor  and  capital ;  but  after  the  application  of 
two  units  "  the  harvest  does  not  increase  in  proportion  to 
the  work  applied." 

If  land  were  free,  if  it  could  be  obtained  as  it  was  by  the 
early  American  settlers,  the  farmer  would  find  it  to  his 
advantage  to  utilize  his  labor  and  capital  in  such  a  manner 


64  ELEMENTARY   ECONOMICS 

as  to  use  two  units  to  every  160  acres.  If  land  is  valuable, 
if  additional  land  must  be  rented  and  a  rent  paid,  it  may 
be  profitable  to  use  three  or  four  or  more  units  of  labor  and 
capital  upon  160  acres  rather  than  to  rent  more  land,  pay 
more  rent,  and  spread  the  labor  and  capital  over  a  larger 
area.  Without  going  further  into  the  theory  of  diminishing 
returns,  it  may  be  stated  that  the  higher  the  rental  return 
or  the  more  valuable  the  land,  the  greater  the  amount  of 
labor  and  capital  which  may  profitably  be  used  upon  a  given 
acreage  of  land,  or  the  more  intensive  the  cultivation  of  the 
land. 

The  law  of  diminishing  returns  applies  also  to  other  forms 
of  business  activity,  —  manufacturing,  mining,  merchandis- 
ing, transportation,  etc. ;  but  more  labor  and  capital  can, 
as  a  rule,  be  applied  to  a  given  area  of  land  before  diminish- 
ing returns  appear,  than  in  the  case  of  agriculture.  A 
manufacturing  plant  is  spread  out  over  several  lots  instead 
of  being  erected  three  or  four  stories  in  height  on  a  smaller 
area.  Railways  use  two,  three,  and  four  tracks  and  a  wide 
right  of  way  instead  of  one  track  and  a  narrow  right  of  way. 
Diminishing  returns  fix  a  limit  to  the  height  of  office  buildings. 
But,  let  it  be  repeated,  the  more  valuable  the  land  the  more 
intensive  the  utilization  of  labor  and  capital  which  can 
profitably  be  made  upon  the  land. 

If  it  were  not  for  the  appearance  of  diminishing  returns, 
all  manufacture  might  be  conducted  on  a  small  bit  of  ground 
and  all  necessary  agricultural  products  might  be  produced 
upon  a  small  area  of  land.  Under  such  conditions,  good 
land  would  never  become  scarce;  and  it  may  be  assumed 
that  rent  would  not  appear,  or  at  least  would  never  be  of 
much  economic  importance.  Inventions,  new  methods  of 
doing  work,  and  more  eflficient  management  may  enable 


SHARES   IN   THE   NATIONAL   INCOME  65 

enterprisers  to  utilize  profitably  more  labor  and  capital  than 
under  former  conditions;  but  sooner  or  later  a  point  will 
be  reached  when  further  applications  of  labor  and  capital, 
using  the  same  methods  of  application,  will  add  smaller  and 
smaller  yields  per  unit.  , 

Rent  and  Land  Value.  Unlike  interest,  rent  is  rarely 
expressed  by  the  percentage  method.  Rent  is  usually 
reckoned  by  the  lump-sum  method,  so  much  per  acre  or  per 
lot.  The  value  of  a  piece  of  land  is  ultimately  determined 
by  its  rent-bearing  qualities,  present  and  prospective.  Lots 
in  the  downtown  section  of  a  growing  city  are  salable  at 
high  prices  because  such  lots,  if  built  upon,  bring  to  the  owner 
a  high  rent  and  may  confidently  be  expected  to  yield  still 
higher  rents  as  the  city  grows.  Vacant  lots  are  salable 
because  of  prospective  rental  returns.  As  a  rule  rents  in- 
crease and  the  selling  value  of  land  rises  as  the  population 
increases  and  as  business  opportunities  become  more  and 
more  desirable.  In  large  cities,  land  is  often  sold  for  hun- 
dreds of  dollars  per  foot  front.  Land,  as  a  location  upon 
which  to  carry  on  the  work  of  the  world,  has  apparently  no 
upper  limit  as  to  selling  value.  The  selling  value  of  a  build- 
ing, however,  is  always  Approximately  equal  to  the  expense 
of  erecting  a  similar  edifice.  But  land  is  not  produced  as  is 
capital,  and  its  amount  is  limited  and  fixed.  The  fortunate 
owner  of  a  piece  of  land  in  a  large  city  can  receive  a  large 
return  from  it;  he  can  in  effect  levy  toll  upon  his  less 
fortunate  fellow  citizens.  About  one  twelfth  of  the  na- 
tional income  is  taken  by  land  owners  in  the  form  of 
rent. 

Profits.  Profits  "  are  the  surplus  over  and  above  the 
expenses  of  production."  The  rate  of  profits  depends  upon 
the  skill  and  enterprise  of  the  business  man  managing  the 


66  ELEMENTARY   ECONOMICS 

industry  or  upon  some  superior  advantages  in  the  operation 
of  the  business.  After  the  business  man,  the  enterpriser, 
has  paid  all  expenses,  —  for  raw  materials,  fuel,  insurance, 
taxes,  rent,  interest,  wages,  etc.,  —  and  allowed  for  deprecia- 
tion, the  remainder  or  the  surplus  over  and  above  expenses 
is  designated  profits.  Rent,  interest,  and  wages  are  rela- 
tively stable  from  year  to  year ;  but  profits  are  unstable  and 
may  experience  extreme  fluctuations  from  year  to  year.  A 
business  may  suffer  a  loss  or  receive  no  profits  one  year,  and 
receive  large  profits  the  following  twelve  months.  Profits, 
like  rent  and  wages,  vary  from  business  to  business  and  from 
enterpriser  to  enterpriser.  One  steel  plant  under  excellent 
management  may  make  large  profits  while  a  less  able  enter- 
priser in  the  steel  industry  may  receive  only  nominal 
profits.  Also,  unlike  other  shares  in  the  distribution  of  the 
national  income,  profits  are  by  no  means  homogeneous. 
Profits  may  be  roughly  classified  under  one  or  more  quite 
distinct  heads :  wages  of  management,  returns  due  to 
extraordinary  ability  of  the  enterpriser,  chance  gains,  and 
gains  due  to  monopoly  power. 

The  amount  which  must  be  allowed  the  manager  or  enter- 
priser for  his  part  in  directing  the  business  is  the  wages  of 
management.  The  enterpriser  must  decide  upon  the  par- 
ticular methods  used  in  the  operation  of  the  business ;  this 
may  be  differentiated  from  the  work  of  the  wage  earner  who 
follows  directions.  Many  farmers  are  both  laborers  and 
enterprisers.  They  do  some  of  the  regular  farm  work  and 
they  are  also  responsible  for  the  plans  of  operation  which  are 
followed.  Unless  the  profits  received  equal  or  exceed  the 
wages  which  the  enterpriser  could  receive  as  a  hired  laborer 
in  other  plants,  the  enterpriser  is  likely  to  close  up  his  business 
and  become  a  wage  worker. 


SHARES   IN   THE   NATIONAL   INCOME  67 

Enterprisers  or  managers  possess  very  different  grades  of 
ability  and  initiative.  Skillful  managers  who  are  able  to  fore- 
see changes  in  the  business  and  who  are  able  to  coordinate 
efficiently  the  labor  aad  capital  under  their  direction  make 
gains  which  do  not  accrue  to  the  less  capable  and  less  ef- 
ficient managers.  Profits  of  this  sort  may  be  designated  as 
due  to  extraordinary  ability.  This  type  of  profits,  as  well 
as  the  remaining  two  classes,  is  a  surplus  over  and  above 
wages  of  management. 

Chance  gains  are  the  consequences  of  certain  unusual  or 
fortuitous  changes.  Chance  gains  may  often  be  balanced 
in  the  long  run  by  chance  losses.  A  sudden  increase  in 
the  price  of  a  given  commodity  may  allow  certain  producers 
to  make  unusual  profits.  The  recent  rise  in  the  price  of 
cotton  benefited  many  companies  and  individuals  holding 
large  stocks  of  cotton. 

The  most  persistent  and  the  most  important  kind  of  profits 
is  monopoly  profits.  In  a  succeeding  section,  the  price- 
fixing  plan  of  the  monopolist  will  be  discussed.  If  a  mo- 
nopoly is  successful,  if  it  is  worth  while,  the  market  price  of 
the  monopolized  commodity  will  be  so  fixed  that  greater 
net  returns  will  be  received  by  the  monopolist  than  would 
accrue  under  competitive  conditions.  This  additional  re- 
turn is  a  monopoly  profit.  In  the  case  of  a  well-established 
monopoly,  extraordinary  returns  will  be  received  year  after 
year  by  the  fortunate  owners  of  the  monopoly. 

SUGGESTIONS  AND   TOPICS   FOR   DISCUSSION 

In  this  chapter,  many  difficult  theoretical  problems  in  regard  to 
wages,  interest,  rent,  and  profits  have  been  omitted  or  merely  hinted 
at.  Different  theories  are  advanced  by  different  writers  on  econom- 
ics. The  attention  of  the  student  is  particularly  caUed  to  the  fact 
that  the  majority  of  authorities,  unlike  the  author,  designate  fer- 


68  ELEMENTARY   ECONOMICS 

tility  of  the  soil  as  a  property  of  land  rather  than  as  a  form   of 
capital. 

1.  What  is  the  average  wage  of  unskilled  workers  in  your  com- 
munity?    Of  machinists?     Of  teachers? 

2.  What  is  the  usual  rate  of  interest  on  notes  secured  by  good 
first  mortgages  ? 

3.  What  is  the  interest  rate  on  bonds  issued  by  your  city  or 
town? 

4.  Where  is  the  most  valuable  land  located  in  your  city  ?      Why  ? 
What  is  its  selling  value  per  foot  front  ? 

5.  Do  you  know  of  any  case  of  chance  gains  made  in  your  com- 
munity?    Of  monopoly  profits  ? 


CHAPTER  VII 
WEALTH  AND   INCOME 

Distribution  of  Wealth  in  the  United  States.  Wealth  is 
desired  by  individuals  because  its  ownership  gives  an  in- 
come to  the  owner;  it  makes  possible  the  satisfaction  of 
wants  and  desires;  it  enables  the  owner  to  command  the 
labor  and  the  time  of  others.  The  money  value  of  the 
wealth  of  the  American  nation  —  farms,  factories,  mines, 
buildings,  railways,  raw  materials,  finished  products,  etc. — 
was  estimated  in  1917  to  equal  approximately  the  enormous 
sum  of  $240,000,000,000.  This  amount  is  so  large  that  we 
cannot  adequately  grasp  its  significance.  Assuming  that 
there  are  22,000,000  families  in  the  United  States,  the 
average  money  value  of  the  wealth  per  family  is  about 
$11,000.  The  total  given  above  includes  all  property 
owned  by  the  national,  state,  and  local  governmental  units. 
The  amount  actually  owned  by  private  families  is,  therefore, 
reduced  somewhat  below  this  figure.  The  distribution  of 
this  amassed  wealth  is  very  unequal.  On  the  one  hand, 
hundreds  of  thousands  of  families  own  only  a  very  small 
amount  of  property ;  but  at  the  other  end  of  the  list  is  the 
billionaire. 

The  following  is  a  conservative  estimate  of  the  approxi- 
mate distribution  of  wealth  in  the  United  States :  The 
wealthy  class,  including  about  two  per  cent  of  the  people, 
own  sixty  per  cent  of  the  wealth  of  the  nation ;  the  middle 
class,  numbering  about  one  third  of  the  total  population, 

69 


70  ELEMENTARY   ECONOMICS 

own  thirty-five  per  cent  of  the  wealth ;  and  the  great  class 
of  the  poor,  sixty-five  per  cent  of  the  total  population,  own 
only  five  per  cent  of  the  nation's  wealth.  The  average 
amount  owned  by  a  member  of  the  great  poor  class  was 
estimated  to  be  $400 ;  the  great  mass  of  wageworkers  are 
practically  disinherited.  At  the  other  extreme  are  the 
families  possessed  of  great  fortunes.  If  the  largest  be 
$1,000,000,000,  it  is  equal  to  the  estimated  wealth  of 
2,500,000  of  the  poor,  —  a  larger  number  of  persons  than 
live  in  the  third  city  of  the  United  States,  Philadelphia. 

Income.  The  income  of  the  nation  —  of  all  families  and 
the  net  income  derived  from  governmental  industries  —  is 
the  sum  total  of  all  that  the  nation  produces  over  and  above 
an  allowance  for  depreciation.^  This  income  may  be  calcu- 
lated, the  student  should  remember,  by  subtracting  from  the 
gross  product  of  the  nation  an  allowance  for  depreciation, 
or  wear  and  tear,  upon  buildings,  machines,  railways,  and  all 
other  forms  of  capital  used  in  the  country.  This  income  may 
roughly  be  divided  into  two  classes :  income  from  services 
and  income  from  property,  land,  capital,  and  monopoly 
_^rivileges.  The  money  value  of  the  annual  national  income, 
that  is,  the  goods  and  services  produced  by  all  the  work 
and  activity  of  the  people  of  the  United  States,  was  estimated 
in  1917  to  be  from  thirty-five  to  forty  billions  of  dollars. 
Of  this  vast  sum,  about  two  fifths  was  property  income  and 
approximately  three  fifths  was  service  income.  Two  fifths 
of  the  national  income  goes  to  the  owners  of  land,  capital, 
and  monopoly  privileges  in  the  form  of  rent,  interest,  and 
extraordinary  profits;  three  fifths  is  received  by  workers 
of  various  kinds  in  the  forms  of  wages,  salaries,  fees, 
ordinary  profits,  and  the  like. 

1  See  Chapter  V. 


WEALTH  AND   INCOME  71 

Some  men  and  women  receive  large  incomes  without  work- 
ing because  they  own  land,  capital,  or  some  monopoly 
privilege;  others  work  long  and  strenuously  for  a  mere 
pittance.  According  to  the  income  tax  returns  for  1914, 
there  were  forty-four  families  in  the  United  States  with  an 
annual  income  of  one  million  dollars  or  more.  A  few  years 
ago,  a  banker  of  prominence  estimated  that  the  annual 
income  of  the  wealthiest  American  was  $65,000,000,  —  it 
was  undoubtedly  larger  in  1919.  Assuming  that  $730  was 
in  1914  the  average  annual  income  of  a  wage  earner's  family, 
the  income  of  this  one  wealthy  individual  nearly  equaled 
the  income  of  90,000  families  of  hard-working  wage- 
workers. 

The  contrasts  between  wealth  and  poverty  are  seen  on 
every  hand  in  all  of  our  large  cities.  Great  luxury  on  the 
one  hand  is  found  and  on  the  other  extreme  poverty.  Mil- 
lions of  families  in  this  great  nation  of  ours  have  less  than  a 
sufficiency  for  physical  health  and  social  decency;  while 
many  are  surfeited  with  luxury.^  Thousands  of  school  chil- 
dren in  democratic  America  are  "  noticeably  underfed  and 
ill-nourished."  The  problem  of  family  finance  is  difficult 
of  solution  for  the  average  American  workingman.  "  Mak- 
ing both  ends  meet  "  is  indeed  a  hard  task  for  the  wage- 
worker  and  his  family. 

Careful  investigations  made  before  the  opening  of  the 
Great  War  indicated  that  the  income  of  many  families  of 
American  wage  earners  was  insufficient  to  maintain  a 
standard  of  living  sufficiently  high  to  assure  the  physical 
efficiency  of  the  family.  A  low  income  indicates  poor  food 
and  insufficient  nourishment,  inadequate  clothing,  over- 
crowded, poorly  ventilated,  improperly  heated  and  lighted 
homes.     It  also  means  little  or  undesirable  recreation,  few 


72  ELEMENTARY   ECONOMICS 

magazines  and  books,  and  insufficient  medical  and  dental 
care.  Grinding  and  hopeless  poverty  —  the  poverty  of  the 
tenement  and  of  the  slums  —  is  a  menace  to  the  welfare 
and  stamina  of  the  race.  Since  the  war  began,  money  wages 
have  risen,  but  it  is  a  matter  of  common  knowledge  that 
prices  have  also  taken  an  upward  course. 

Family  Budgets.  The  United  States  Bureau  of  Labor 
in  1903  made  a  careful  study  of  the  income  and  expenditures 
of  11,156  "normal"  families  of  American  wage  earners. 
A  normal  family  was  defined  as  one  having  the  husband  at 
work,  a  wife,  not  more  than  five  children,  none  being  over 
fourteen  years  of  age,  no  dependents,  boarders,  or  servants. 
The  total  average  yearly  income  of  the  11,156  families 
studied  was  $650.98 ;  and  the  average  annual  expenditures 
per  family  were  $617.80.  The  expenditures  were  divided  as 
follows : 

Per  Cent 

Food 43.13 

Rent 18.12 

Clothing 12.95 

Fuel  and  Lighting 5.69 

Sundries 20.11 

Sundries,  it  will  be  noticed,  evidently  included  expendi- 
tures for  medicine  and  for  the  services  of  physicians  and 
dentists,  insurance,  books,  magazines  and  newspapers,  and 
recreation.  In  families  having  five  children  the  percentage 
of  expenditures  for  food  was  47.24 ;  while  in  families  having 
no  children  the  percentage  was  40.33.  The  total  average 
income  and  the  average  expenditures  of  the  families  of 
American  wage  earners  have  doubtless  increased  since  1903, 
but  the  percentages  have  probably  not  been  markedly 
modified. 


WEALTH  AND   INCOME  73 


TOPICS   FOR   DISCUSSION 

1.  Make  an  estimate  of  the  price  of  goods  consumed  personally 
by  yourself  during  the  past  year. 

Food  —  include  ice  bill. 

Rent  of  home  (If  owned  by  family,  take  the  interest  on  the  value 
of  the  house  and  lot  and  household  furniture,  add  repairs,  insurance, 
and  taxes). 

Clothing. 

Fuel  and  light. 

Recreation. 

Sundries. 

In  the  case  of  food,  rent,  fuel,  and  light  divide  the  family  expense 
by  the  number  in  the  family. 

2.  Find  the  average  for  the  class.  (The  reports  need  not  be 
signed.) 

3.  How  large  a  yearly  income  is  required  in  your  community 
adequately  to  maintain  a  "normal"  family  of  a  wage  earner? 


CHAPTER  VIII 
GROWTH  AND   DISTRIBUTION   OF   POPULATION 

The  Increase  in  Population.  The  population  of  the  world 
increased  very  rapidly  during  the  nineteenth  century ;  it  is 
estimated  that  the  population  in  1915  was  nearly  three  times 
that  of  1800.  The  number  of  persons  living  in  the  seven 
most  important  European  countries,  Russia,  Germany, 
Austria-Hungary,  France,  Italy,  Spain,  and  the  United 
Kingdom,  increased  from  approximately  156  millions  in 
1800  to  344  millions  in  1900.  The  increase  in  the  population 
of  these  seven  nations  was  greater  during  the  last  century 
than  the  total  population  at  the  end  of  the  preceding  hun- 
dred-years period.  In  the  United  States,  the  rate  of  in- 
crease was  much  more  considerable.  The  increase  was 
from  about  5,300,000  in  1800  to  76,000,000  in  1900  and 
92,000,000  in  1910.  The  rates  of  increase  in  the  eight  nations 
mentioned  above  were  very  dissimilar.  The  percentage  of 
increase  for  the  entire  century  was  the  least  (45  per  cent)  in 
France  and  the  most  considerable  (1326  per  cent)  in  the 
United  States.  No  reliable  statistics  are  obtainable  for  the 
centuries  preceding  1800 ;  but  it  is  generally  conceded  that 
the  population  of  Europe  remained  about  stationary  in  the 
Middle  Ages  and  increased  very  slowly  down  to  the  opening 
of  the  nineteenth  century.  The  nineteenth  century  was  a 
period  of  remarkable  increase  in  total  population,  in  the 
growth  of  cities,  of  rapid  evolution  of  scientific  methods  of 
production,  and  of  growing  security  of  political  relations. 

74 


GROWTH  AND   DISTRIBUTION   OF  POPULATION      75 

The  increase  in  population  during  the  nineteenth  century 
may  be  ascribed  chiefly  to  two  interrelated  human  achieve^ 
ments:  (1)  the  extraordinary  increase  in  the  per  capita 
production  of  the  means  of  subsistence ;  and  (2)  the  decrease 
in  the  death  rate.  The  productive  capacity  of  a  twentieth- 
century  man  using  machinery  and  aided  by  natural  forces 
such  as  steam  power  and  electricity  is  many  times  greater 
than  that  of  the  eighteenth-century  man  using  hand  tools. 
The  productive  capacity  of  the  Western  world  increased 
faster  than  the  population.  The  masses  of  the  people  at 
the  end  of  the  century  were  enabled  to  have  more  and  better 
food,  clothing,  and  shelter  than  at  the  opening  of  the  period. 
The  decline  in  the  death  rate  was  due  to  this  fact  coupled 
with  advances  in  medical  and  sanitary  science.  The  birth- 
rate of  civilized  countries  declined  during  the  century,  es- 
pecially in  the  latter  portion  of  the  period. 

Growth  of  Cities.  Even  more  remarkable  than  the  in- 
crease in  total  population  has  been  the  growth  of  cities. 
The  city  of  to-day  is  the  product  of  modern  industrialism, 
engineering,  and  sanitary  science.  Ancient  cities  were 
comparatively  few  in  numbers,  small  in  population,  and  un- 
heal thful.  The  death  rate  in  medieval  cities  was  also  very 
high.  Because  of  recent  achievements  in  transportation, 
in  scientific  agriculture,  in  manufacture,  and  in  mining,  large 
aggregations  of  pJopulation  are  able  to  receive  a  regular  and 
sufficient  supply  of  food,  fuel,  and  other  necessities.  Other 
technical  achievements  have  added  to  the  attractions  which 
induce  people  to  dwell  together  in  large  numbers.  Before 
the  nineteenth  century  the  p^dominant  type  of  civilization 
was  rural ;  to-day  the  typical  citizen  is  an  urban  dweller. 

In  1800,  there  were  in  the  United  States  only  six  cities 
with  a  population  of  8000  or  more ;  a  century  later  there  were 


76  ELEMENTARY   ECONOMICS 

556  such  cities  and,  in  1910,  779.  "  In  1790,  only  3.35  per 
cent  of  the  people  of  the  United  States  lived  in  cities.  By 
1900  the  majority  of  the  population  in  fifteen  states  was 
urban  and  over  two  thirds  of  the  population  of  eight  states." 
In  1916,  forty-one  per  cent  of  the  population  lived  in  cities 
of  8000  or  more  inhabitants ;  and  each  of  three  cities  boasted 
a  population  of  over  1,000,000.  The  estimated  population 
of  Greater  New  York  in  1916  was  5,600,000,  —  a  greater 
number  of  persons  than  lived  in  the  United  States  in  1800. 
The  cities  of  Europe  have  also  grown  with  extraordinary 
rapidity  since  1800.  London,  Paris,  Rome,  Vienna,  and 
Petrograd  have  rivaled  New  York,  Philadelphia,  and  Boston 
in  the  rapidity  of  their  increase  in  population.  The  popula- 
tion of  Paris  was  547,000  in  1800,  and  2,714,000  in  1901 ; 
the  figures  for  Berlin  for  the  same  years  are  172,000  and 
1,888,000. 

Population  and  Resources.  Many  of  the  most  vital 
questions  affecting  the  welfare  of  the  men  and  women  of 
to-day  center  around  the  problem  of  population.  The  core 
of  the  problem  of  population  may  be  reached  directly  by 
asking :  What  is  the  best  relation  between  population  and 
resources  ?  In  primitive  times  clearly  the  population  of  a 
given  area  was  of  necessity  limited  to  a  comparatively  small 
number;  but  modern  methods  of  production  require  for 
efficient  functioning  a  much  larger  population.  But  how 
large?  Increase  in  numbers  has  made  possible  division  of 
labor  and  increased  production;  it  replaces  isolation  by 
established  and  varied  social  relationship  ;  cities,  good 
transportation  facilities,  the  daily  paper,  the  art  and  leisure 
of  to-day,  and  a  multitude  of  other  visible  accompaniments 
of  modern  life,  have  come  into  being  as  the  population  has 
increased.     But  there  is  a  limit  to  the  desirable  increase. 


GROWTH   AND   DISTRIBUTION   OF   POPULATION      77 

In  some  portions  of  the  earth's  surface  where  natural 
resources  are  provided  in  a  niggardly  manner  and  climatic 
conditions  are  unfavorable,  even  a  scanty  population  cannot 
be  maintained  in  comfort.  Again,  in  extremely  fertile 
regions  the  population  may  be  so  great  and  the  productive 
methods  so  backward  that  the  great  mass  of  the  inhabitants 
live  in  extreme  poverty.  China  is  an  example  of  a  nation 
having  too  great  density  of  population.  The  most  welcome 
condition  is  one  in  which  the  population  is  sufficiently  large 
to  allow  the  use  of  big-scale  and  scientific  methods  of  pro- 
duction, transportation,  and  marketing;  but  not  so  great 
as  to  cause  a  reduction  of  the  average  income  per  person  as 
the  numbers  increase.  The  desirable  balance  of  population 
and  of  resources  changes  from  time  to  time  and  from  country 
to  country. 

Evidently,  if  the  population  tends  to  increase  faster  than 
the  improvements  in  the  productive  capacity  of  the  nation, 
the  average  share  of  necessities  and  comforts  will  be  reduced. 
The  population  will  be  on  the  road  toward  greater  and 
greater  misery,  toward  lower  and  lower  standards  of  living. 
But,  under  such  unfortunate  circumstances,  stronger  in- 
dividuals and  groups  will  try  to  maintain  their  accustomed 
standards  of  living  at  the  expense  of  weaker  individuals, 
groups,  or  classes.  At  the  same  time,  the  temptation  will 
be  strong  to  migrate  to  and  to  control  the  thinly  occupied 
and  not  well-developed  portions  of  the  globe.  A  condition 
of  this  type  produces  antagonisms  which  are  likely  to  be 
fatal  to  the  development  of  democracy,  and  which  offer  many 
opportunities  for  international  friction. 

The  Immigrant  in  the  United  States.  It  was  pointed  out 
in  an  earlier  chapter  that  the  pressure  of  population  upon 
the  food  supply  was  the  cause  of  much  primitive  warfare. 


78  ELEMENTARY   ECONOMICS 

In  modern  times,  the  pressure  of  population,  the  demand  for 
markets  and  the  desire  for  the  control  of  natural  resources 
are  potent,  underlying  causes  of  struggle  between  nations. 
A  militaristic  people  have  always  emphasized  the  importance 
of  a  large  population.  The  autocrats  of  the  world,  the  ad- 
vocates of  the  "  mailed  fist,"  have  ever  dilated  upon  the 
desirability  of  a  high  birth-rate  without  giving  adequate 
weight  to  the  probable  effect  upon  the  level  of  comfort. 
Food  for  the  Dogs  of  War  was  the  foremost  consideration ; 
the  mass  of  men  and  women  were  the  weapons  of  the  military 
leaders. 

But  in  a  democracy  in  which  the  welfare  of  the  masses, 
not  the  privileges  of  an  autocratic  group,  is  of  first  considera- 
tion, the  argument  in  favor  of  a  high  birth-rate  and  a  very 
dense  population  loses  much  of  its  attractiveness.  The 
quality,  rather  than  the  quantity,  of  the  population  is  placed 
in  the  foreground.  The  question  of  *'  who  "  is  more  im- 
portant than  that  of  ''  how  many."  Quality  counts.  In  a 
democracy,  it  is  essential  that  the  population  shall  not  be  so 
great  that  the  common  man  can  have  only  a  small  share  in 
the  benefits  of  technical  advance  and  of  civilization.  A 
large  number  of  poor,  ignorant,  improperly  nourished,  and 
incapable  citizens  are  a  menace  to  a  democracy.  A  demo- 
cratic form  of  government  can  be  highly  successful  only  when 
its  citizens  are  intelligent  and  not  too  dissimilar  in  wealth 
and  opportunity. 

A  study  of  the  composition  of  the  people  of  a  city,  a  state, 
or  the  nation  involves  political  and  social  as  well  as  economic 
considerations.  America  has  often  been  called  a  melting 
pot.  To  our  shores  have  come  great  mixtures  of  peoples,  — 
English,  Irish,  German,  Jew,  Italian,  Pole,  Swede,  Norwegian, 
Negro,  Chinese,  and  many  others.     Are  the  elements  too 


GROWTH   AND    DISTRIBUTION   OF   POPULATION      79 

diverse?  Is  Americanization  going  on  effectively?  Wave 
after  wave  of  immigrants  has  come  to  our  shores.  These 
newcomers  leave  their  homeland  because  of  adverse  eco- 
nomic or  political  conditions,  hoping  to  find  a  land  of  promise 
in  America.  They  are,  as  a  rule,  accustomed  to  a  low 
standard  of  living  and  are  willing  to  accept  a  low  wage. 
In  recent  decades,  the  great  mass  of  immigrants  come  from 
Southern  and  Southeastern  Europe  and  enter  into  manu- 
facturing, mining,  and  construction  work  as  wage  earners. 
The  recent  immigrants  are  doing  a  large  share  of  the  rough, 
hard,  distasteful  kinds  of  work.  They  huddle  together  in 
certain  districts  of  our  cities  and  towns  in  which  the  housing 
and  sanitary  conditions  are  undesirable.  And  here  they 
have  been  too  often  neglected  or  exploited  by  the  remainder 
of  the  community.  Since  the  opening  of  the  war  in  1914, 
the  influx  of  immigrants  has  been  very  greatly  reduced; 
and  the  war  has  emphasized  the  need  of  better  treatment 
of  the  recent  immigrants  in  order  that  they  may  become 
Americanized  and  unmistakably  loyal  to  their  adopted 
country. 

The  Negro  Problem.  The  Negro  in  the  United  States 
has  given  Americans  a  very  difficult  problem  to  solve.  Like 
the  immigrant,  the  Negro  is  a  low-standard-of -living  worker ; 
but  the  wide  difference  in  race  and  color  between  the  white 
and  the  colored  people  makes  the  Negro  problem  much  more 
complex  than  that  of  the  Americanization  of  the  European 
immigrant.  White  workers  dislike  to  work  with  the  Negro, 
white  householders  dislike  to  have  the  blacks  for  neighbors, 
and  the  white  traveler  wishes  the  blacks  to  ride  in  a  separate 
compartment.  It  is  indeed  difficult  for  a  depressed  race 
just  emerging  from  slavery  and  still  in  the  depths  of  poverty 
and  as  yet  unblessed  by  many  of  the  traits  which  make  for 


80  ELEMENTARY   ECONOMICS 

health,  honesty,  and  regular  industry,  to  receive  fair  treat- 
ment from  a  group  of  very  different,  more  efficient,  and  more 
masterful  men.  But  certain  it  is  that  the  problem  can  only 
be  solved  through  the  exercise  of  forbearance  and  square 
dealing.  Harshness  and  unfair  treatment  only  aggravate 
the  difficulty  and  delay  the  day  of  final  solution. 

The  Negro  was  brought  to  this  country  because  short- 
sighted landowners  saw  an  opportunity  to  make  immediate 
gains  through  the  use  of  a  cheap  and  docile  labor  force. 
They  ignored  the  difficult  problems  certain  to  result  from  the 
presence  of  a  labor  force  of  that  type.  Until  the  opening 
of  the  present  century,  the  Negro  problem  was  almost  en- 
tirely a  problem  of  the  cotton  belt  of  the  South.  But  in  re- 
cent years  a  considerable  stream  of  Negro  laborers  has  been 
flowing  into  the  cities  of  the  North.  As  a  consequence  our 
social  problems  in  the  North  will  be  further  complicated 
by  the  presence  of  the  black  race. 

TOPICS   FOR   DISCUSSION 

1.  According  to  the  Census  Reports,  what  was  the  population 
of  your  State  in  1860,  1870,  1880,  1890,  1900,  and  1910? 

2.  What  was  the  population  of  your  city  or  town  in  1900  and 
1910?     What  is  its  estimated  population  to-day? 

3.  How  many  different  nationalities  are  found  in  your  com- 
munity ? 

4.  How  many  Negroes  are  living  in  your  community?     What 
kinds  of  work  are  the  Negroes  performing? 

5.  Are  workers  leaving  your  town  or  city  for  other  communities  ? 
Why? 


CHAPTER  IX 
COMPETITION   AND   MONOPOLY 

Commodities  are  produced  for  the  markets  of  the  world 
under  conditions  of  competition  or  of  monopoly  or  more 
accurately  of  some  combination  of  the  two.  In  the  business 
world  there  exists  no  case  of  perfect  competition  and  few 
cases  of  complete  monopoly;  such  conditions  obtain 
chiefly  in  the  mind  of  the  economic  theorist.  Practically 
all  marketable  commodities  are  produced  under  conditions 
in  which  both  competition  and  monopoly  play  some  part. 
The  term,  "competition/'  as  used  to-day  means  economic 
rivalry  among  producers,  among  purchasers,  and  between 
producers  (sellers)  and  purchasers,  tending  to  fix  the  market 
price  of  some  economic  good  or  service.  In  this  sense  of 
the  word,  competition  did  not  bulk  large  in  ancient  or 
medieval  times;  custom  and  public  authority  were  the 
potent  instrumentalities  in  fixing  wages  and  prices.  And, 
indeed,  competition  is  at  the  present  time  growing  less  and 
less  influential  as  a  price-fixing  force;  monopoly  and  gov- 
ernmental authority  are  on  every  hand  interfering  with  the 
free  play  of  competition.  But  competition  in  the  broader 
sense  of  personal  rivalry  is  old  and  does  not  seem  likely  to 
vanish.  Every  producer  (seller)  of  commodities  is  anxious 
to  gain  advantages  for  himself ;  and  each  purchaser  is  like- 
wise desirous  of  getting  the  greatest  possible  return  for  his 
or  her  expenditures  of  purchasing  power.  Under  com- 
petitive conditions  each  seller  and  each  buyer  is  checked  and 
restrained  by  the  presence,  actual  or  potential,  in  the  market 
of  other  sellers  and  buyers. 

G  81 


82  ELEMENTARY   ECONOMICS 

Regulated  Competition.  Competition  in  the  business 
world  is  always  regulated  in  some  degree.  Unrestrained 
competition  of  the  ''  tooth  and  claw  ''  or  the  *'  jungle  " 
type,  competition  to  the  death  without  any  restraining  rules 
or  regulations,  no  longer  obtains.  In  fact,  such  competition 
has  probably  never  existed  in  human  society.  It  would  be 
much  like  playing  a  game  without  rules.  Competition  takes 
place  to-day  under  the  restraint  of  law,  private  property, 
inheritance,  family  relations,  custom,  etc.  Even  war  is 
subject  to  certain  international  regulations.  Regulation  of 
competition  does  not  mean  its  elimination;  regulation 
modifies  the  conditions  or  the  level  of  competition.  An 
illustration  from  another  field  may  help  the  student  to  see 
the  point  clearly.  Cultivation  is  the  regulation  of  com- 
petition in  the  vegetable  world  by  agriculturalists.  The 
fierce  competition  of  the  hardy  weed  is  in  a  measure  removed ; 
but  the  competitive  principle  is  retained  on  a  different  and 
higher  level.  The  wild  grape  is  a  product  of  unregulated, 
"  jungle,"  competition ;  the  Concord,  of  regulated  com- 
petition. The  rules  of  a  game  on  the  athletic  field  bar  cer- 
tain forms  of  rivalry ;  but  competition  and  rivalry  actively 
continue  within  certain  well-defined  limits.  The  foot- 
ball player  may  not  slug  his  opponent  or  carry  the  ball  after 
it  is  "  down  " ;  but  no  one  who  witnesses  a  football  game 
doubts  that,  within  prescribed  limits,  active  rivalry  and 
competition  are  found  on  the  football  gridiron.  "  Fair  " 
competition  takes  place  under  regulation,  according  to  the 
accepted  rules  of  the  business  game.  Monopoly  and  special 
privileges  tend  to  eliminate  rivalry,  or  to  give  unfair  ad- 
vantages to  the  favored  few  unless  carefully  regulated  in  the 
interests  of  the  community. 

Under  competition  with  several  sellers  and  several  buyers 


COMPETITION   AND   MONOPOLY  83 

the  long-run  or  steady  prices  tend  to  equal  the  expense  of 
producing  the  commodity.  In  the  expense  of  production 
are  included  profits  equivalent  to  wages  of  management. 
But  the  prices  on  the  market  often  fluctuate  greatly  above 
or  below  the  steady  or  normal  price,  —  as,  for  example,  the 
price  of  strawberries  late  Saturday  night  is  often  very  low, 
much  lower  than  the  expense  of  producing  the  berries  or 
the  normal  or  long-run  price.  However,  there  are  very 
few  cases  of  free  competition.  The  retail  merchants  in  a 
given  town,  nominally  competitors,  make  tacit  or  actual 
agreements  as  to  prices.  The  milkmen  of  a  city  raise  their 
prices  is  unison  as  if  they  belonged  to  one  firm.  Agreements 
and  combinations  are  found  in  so  many  and  so  varied  forms 
that  free  competition  is  practically  an  historic  phenomenon. 
Almost  everywhere  along  the  line  from  the  producer  to  the 
consumer,  competition  is  checked  and  stifled.^ 

As  competition  means  a  minimum  of  profits,  business  men 
are  constantly  trying  to  escape  the  full  pressure  of  com- 
petitive forces,  by  agreements,  by  combinations,  and  through 
monopoly.  Monopoly  power  signifies  the  ability  to  restrict 
the  output  of  the  product  monopolized  and  as  a  consequence 
the  ability  to  regulate  the  price  at  which  it  is  sold.  As  soon 
as  competition  is  partially  eliminated,  business  men  endeavor 
to  fix  prices  not  at  the  expense  of  production  but  at  prices 
"  which  the  traffic  will  bear."  The  price  of  a  commodity 
controlled  by  a  strong  and  fairly  permanent  monopoly 
will  be  that  which  will  give  the  highest  net  returns  or  the 
greatest  monopoly  profits.  This  monopoly  price  is  not 
always  a  high  price  because  raising  the  price  as  a  rule  reduces 
the  number  of  articles  sold.     A  large  profit  on  each  of  a  small 

1  Some  critics  will  hold  that  this  statement  exaggerates  the  absence  of 
competition. 


84  ELEMENTARY   ECONOMICS 

number  of  articles  may  be  less  than  a  smaller  profit  on  a 
much  larger  number  of  sales.  In  case  the  monopoly  power 
is  not  considerable  or  stable,  prices  may  be  fixed  somewhat 
below  what  will  give  the  highest  profit  or  what  the  traffic 
will  bear.  One  or  more  of  several  reasons  may  determine 
the  policy  adopted.  The  business  men  joined  together  by 
agreements  or  combinations  may  fear  that  new  competitors 
might  come  into  the  field  if  too  large  profits  are  received, 
and  thus  *'  spoil  "  the  market;  it  may  be  possible  to  get 
satisfactory  substitutes  for  the  particular  commodity;  or 
government  intervention  may  be  feared.  Consequently,  a 
monopoly  or  a  semi-monopoly  may  not  exact  all  that  is 
possible  from  the  purchasers ;  but  the  ideal  price  from  the 
seller's  point  of  view  is  always  "  what  the  traffic  will  bear.'* 
A  successful  monopolistic  business  will  bring  more  profits 
with  the  same  outlay  for  wages,  capital,  and  management 
than  will  a  competitive  business  of  the  same  type.  This 
added  return  is  called  monopoly  profit.  It  is  paid  for  by 
the  consumer  (final  purchaser)  of  the  product ;  monopolistic 
price  is  higher  ordinarily  than  competitive  price. 

The  partial  and,  in  some  cases,  the  complete  elimination 
of  competition  is  not  wholly  an  evil.  Competition  often 
leads  to  unnecessary  and  wasteful  duplication  of  plants  and 
of  labor  power.  There  are  usually  too  many  grocery  stores 
in  a  small  city  for  efficient  service.  Two  or  three  milkmen 
delivering  on  the  same  street  for  different  companies  is  an 
inefficient  method  compared  with  the  method  of  delivering, 
mail.  Two  gas  plants  in  one  town  produce  gas  in  a  wasteful 
manner ;  one  plant  would  be  much  more  economical.  Com- 
petition has  led  in  many  instances  to  adulteration  of  products 
and  the  use  of  inferior  articles  in  filling  a  contract.  Com- 
petition means  a  dearth  of  profits ;  and  a  business  man  is  in 


COMPETITION   AND   MONOPOLY  85 

business  primarily  for  profits.  On  the  other  hand,  while 
partial  or  fairly  complete  monopoly  may  possess  certain 
advantages  in  economical  operation  over  competition,  unless 
effective  regulation  intervene  these  savings  will  go  to  the 
monopolist  rather  than  to  the  consumer.  Neither  unregu- 
lated competition  nor  unrestricted  monopoly  can  longer 
be  tolerated  by  society. 

Classification  of  Monopolies.  Monopolies  are  of  many 
different  types;  several  classifications  of  monopolies  have 
been  made  by  students  of  the  monopoly  problem.  Monopo- 
lies are  either  public  or  private.  A  public  monopoly  is  owned 
and  operated  by  some  governmental  unit,  —  national,  state, 
or  local.  The  American  post-office  system  and  a  municipal 
water  plant  are  examples  of  public  monopolies.  Such 
monopolies  are  operated  primarily  not  for  profits  but  for 
the  benefit  of  the  community.  A  private  monopoly  is 
operated  and  owned  by  an  individual  or  by  a  private  corpo- 
ration. In  the  case  of  the  private  monopoly,  the  profits  go 
into  the  pockets  of  private  individuals. 

Monopolies  may  also  be  conveniently  classified  as  social 
or  natural.  Social  monopolies  rest  upon  some  special 
privilege  granted  by  the  government  or  by  some  other 
monopoly.  Patents  and  copyrights  are  familiar  examples 
of  a  social  monopoly  resting  upon  a  specific  grant  by  the 
government.  Certain  businesses  have  been  monopolized 
by  governments.  The  tobacco  monopoly  of  France  and  the 
old  salt  monopolies  of  European  states  are  social  monopolies. 
A  few  decades  ago  certain  monopolies  were  established  and 
maintained  by  rebates  from  railroads.  A  natural  monopoly 
depends  upon  forces  which  develop  independently  of  the 
will  of  human  beings.  The  anthracite  coal  of  Pennsylvania 
is  produced  under  conditions  of  monopoly  due  chiefly  to  the 


86  ELEMENTARY   ECONOMICS 

restricted  area  in  which  this  important  product  is  found. 
Railways  and  municipal  utilities  furnish  examples  of  natural 
monopolies.  The  reasons  why  both  railways  and  municipal 
utilities  are  naturally  monopolistic  businesses  will  be  dis- 
cussed in  a  later  chapter. 

Examples  of  Natural  Monopolies.  Anthracite  or  hard 
coal  is  a  well-known  fuel  which  is  used  for  heating  or  cooking 
in  from  one-fourth  to  one-half  of  all  the  homes  in  the  United 
States.  Practically  all  of  the  anthracite  coal  deposits  of 
the  nation  are  found  in  Northeastern  Pennsylvania.  At 
the  present  rate  of  mining  the  supply  of  anthracite  coal  is 
sufficient  to  last  for  approximately  a  century  or  until  2020. 
The  anthracite  coal  fields  to  which  so  many  men,  women, 
and  children  of  America  look  for  warmth  in  the  cold  weather 
of  winter  are  owned  and  the  coal  is  mined  by  a  small  group 
of  allied  companies.  These  companies  have  been  able  to 
fix  the  price  of  coal  at  such  a  figure  as  will  give  them  large 
profits.  If  these  allied  companies  fix  a  high  price  for  the 
coal  which  you  wish  to  put  in  your  coal  bin,  no  other  com- 
panies can  offer  to  sell  the  coal  to  you  at  a  lower  figure. 
No  other  important  companies  are  mining  anthracite  coal. 
This  enormously  valuable  mineral,  a  gift  of  nature  as  much 
as  is  air  or  sunlight,  is  owned  and  its  price  fixed  by  a  few 
men,  not  by  the  majority  of  the  men  and  women  of  America. 
And  the  monopoly  profits  go  to  a  few  fortunate  individuals. 

The  Standard  Oil  Companies  and  affiliated  corporations 
bearing  other  names  constitute  a  partial  monopoly  in  the 
business  of  refining  crude  oil.  There  are  some  competitors, 
but  the  Standard  Oil  group  of  companies  dominates  the 
situation.  It  is  a  refiners'  monopoly  controlling  a  large 
percentage  of  the  output  of  the  refineries  of  the  United  States. 
Only  a  comparatively  small  number  of  oil  wells  are  owned 


COMPETITION   AND   MONOPOLY  87 

by  the  Standard  Oil  interests.  The  great  organization  has 
been  built  up  through  efficient  management,  rebates  granted 
in  the  earlier  part  of  its  career  by  railways,  and  by  means 
of  the  control  of  pipe  lines  through  which  the  crude  oil  is 
pumped  from  the  wells  to  the  refineries.  Crude  oil  can  be 
pumped  in  pipe  lines  belonging  to  the  Standard  Oil  companies 
from  Oklahoma  to  the  Atlantic  seaboard.  Enormous  profits 
have  been  made  by  the  Standard  Oil  interests ;  dividends  of 
40  per  cent  or  more  have  not  been  uncommon.  Mr.  J.  D. 
Rockefeller,  the  founder  of  the  Standard  Oil  Company,  is 
probably  the  richest  man  in  the  world.  The  control  of  an 
important  natural  product  such  as  petroleum  enables  the 
owner  of  the  monopolistic  organization  to  reap  large  returns ; 
but  the  consumers  must  foot  the  bill. 

One  of  the  best  examples  of  monopoly  through  the  control 
of  patents  is  offered  by  the  United  Shoe  Machinery  Company. 
This  corporation  owns  patents  on  various  machines  used  in 
the  manufacture  of  shoes.  The  company  makes  the  ma- 
chines. Instead  of  selling  them  to  shoe  manufacturers,  it 
is  the  practice  of  the  company  to  lease  the  machines.  The 
contract  signed  by  the  shoe  manufacturer  obliges  him  to  use 
the  machinery  of  the  United  Shoe  Machinery  Company  ex- 
clusively. Like  the  Standard  Oil  Company,  this  corpora- 
tion has  made  large  profits. 

TOPICS   FOR   DISCUSSION 

1.  Are  farmers  competitors ?     Storekeepers? 

2.  Does  your  family  purchase  any  articles  produced  under  con- 
ditions of  monopoly? 

3.  If  you  were  a  monopolist,  how  would  you  determine  the  price 
of  the  monopolized  article  sold  by  you  ? 

4.  What  is  the  attitude  of  men  in  your  community  toward 
monopolies  ? 

5.  Do  they  favor  competition  in  all  lines  of  business  activity  ? 


PART  III 
ECONOMIC  PROBLEMS 


CHAPTER  X 
MONEY  AND   BANKING 

Money  Is  a  Measure  of  Purchasing  Power.  Since  at  the 
present  time,  practically  all  workers  work  for  wages,  salaries, 
or  fees,  it  is  necessary  for  them  to  purchase  the  commodities 
which  they  and  their  families  consume,  with  the  wages  they 
receive.  This  exchange  is  ordinarily  consummated  by  means 
of  money.  The  worker  is  paid  in  money  and  pays  in  money 
for  the  articles  which  he  decides  to  purchase.  Money  is  a 
tool  which  easily  enables  persons  to  exchange  their  services 
or  their  products  for  the  services  or  the  products  of  others ; 
it  facilitates  the  exchange  of  commodities  and  services  for 
other  commodities  and  services. 

In  reality,  money  is  wanted  only  because  it  enables  the 
possessor  to  get  the  goods  and  services  which  he  wishes  to 
consume.  Money  is  a  measure  of  purchasing  power ;  it  is  a 
representative  of  other  goods.  Obviously,  money  cannot 
be  consumed;  a  man  with  plenty  of  money  isolated  on  a 
desert  island  would  starve  to  death.  We  really  do  not  want 
money;  it  is  the  commodities  which  money  will  enable  us 
to  purchase  which  we  actually  desire. 

Metallic  Money.  The  early  forms  of  money  were  com- 
modities which  many  members  of  the  community  desired. 
Sundry  articles  such  as  shells,  cattle,  furs,  tobacco,  and  salt, 
have  been  used  for  money  in  times  past.  But  in  recent 
generations  the  metals  have  been  selected  as  the  money  of 

91 


92  ELEMENTARY   ECONOMICS 

the  world ;  and  gold  is  now  the  most  important  form  of 
money.  Gold  is  easily  recognized ;  it  is  durable  and  homo- 
geneous; gold  can  be  divided  into  such  forms  as  may  be 
desired ;  and  it  is  fairly  stable  in  value. 

Coinage.  The  minting  of  money  from  bullion  is  a  public 
business.  Our  money  is  minted  at  the  mints  established  by 
the  federal  government.  The  milled  edges  and  the  designs 
stamped  on  both  faces  of  the  coin  are  intended  to  prevent 
clipping  and  "  sweating  "  of  the  coins  by  means  of  which  a 
portion  of  the  valuable  coin  is  removed  by  dishonest  persons. 
The  government  certifies  to  the  weight  and  the  fineness  of 
the  coins  which  it  issues. 

In  addition  to  gold  coins,  our  government  issues  other 
forms  of  metallic  money,  —  the  silver  dollar,  half-dollar, 
quarters,  dimes,  five-cent  pieces,  and  pennies.  Gold  is  called 
standard  money;  the  other  forms  of  metallic  money  are 
called  token  money.  Gold  is  admitted  to  free  coinage,  that 
is,  gold  bullion  of  the  proper  fineness  may  be  exchanged  at 
the  mint  for  the  same  weight  of  coined  gold.  The  gold  in 
a  gold  coin,  if  the  coin  be  melted,  would  still  be  worth 
practically  the  same  as  in  the  form  of  a  coin.  The  bullion 
in  the  silver  dollar  and  other  smaller  coins  sells  for  less  than 
the  face  value  of  the  coin.  Silver  is  not  admitted  to  free 
coinage.  The  government  mints  enough  of  the  token  money 
to  supply  the  needs  for  small  business  transactions.  Token 
coins  circulate  at  their  face  value  even  though  the  bullion 
in  them  is  worth  less,  because  token  money  is  redeemable 
at  any  time  in  gold.  The  Treasury  Department  will  give, 
for  example,  a  twenty-dollar  gold  coin  for  twenty  silver 
dollars,  or  eighty  quarters. 

Paper  Money.  In  the  United  States  in  addition  to  me- 
tallic money  there  are  several  kinds  of  paper  money  in  cir- 


MONEY  AND  BANKING  93 

culation,  —  gold  certificates,  silver  certificates,  United  States 
government  notes  (greenbacks),  national  bank  notes,  and 
federal  reserve  bank  notes.  The  national  bank  and  the 
federal  reserve  bank  notes  are  issued  by  banks  connected 
with  the  national  banking  system  and  will  be  described  later. 
A  gold  certificate  is  circulated  instead  of  a  certain  gold  piece 
which  is  deposited  in  the  Treasury  of  the  United  States.  Its 
use  saves  the  wear  and  tear  upon  the  valuable  gold  coin. 
A  silver  certificate  is  a  paper  substitute  for  silver  deposited 
in  the  Treasury.  The  United  States  government  notes, 
familiarly  called  greenbacks,  are  merely  promises  to  pay, 
not  bearing  interest,  issued  by  the  federal  government. 
The  number  that  may  be  issued  is  limited  by  law  to  ap- 
proximately $347,000,000.  The  greenbacks  are,  like  token 
money,  kept  at  par  because  the  government  will  redeem 
them  at  any  time  in  gold.  The  Treasury  Department  keeps 
a  reserve  in  gold  for  this  purpose.  This  reserve  is  ordinarily 
kept  at  about  $150,000,000. 

Credit.  Credit  is  the  second  great  tool  of  exchange. 
This  was  not  fashioned  until  long  after  money  was  first  used. 
In  fact,  the  extensive  use  of  credit  is  of  comparatively  recent 
origin,  and  is  a  sign  of  a  highly  organized  industrial  system. 
When  commodities  or  services  are  exchanged  for  money, 
the  transaction  is  closed  by  the  transfer  of  goods  and  money ; 
but  when  credit  is  used  the  time  element  enters.  The  person 
receiving  the  services  or  commodities  promises  to  pay  for 
them  at  some  future  date,  usually  in  money.  In  the  mean- 
time, in  the  typical  case  of  borrowing,  purchasing  power  is 
placed  by  the  lender  in  the  hands  of  the  borrower.  For 
example,  Mr.  A  loans  one  hundred  dollars  to  Mr.  B  for 
one  year;  B  promises  to  return  the  one  hundred  dollars 
plus  an  additional  amount  called  interest. 


94  ELEMENTARY   ECONOMICS 

In  reality,  when  money  is  said  to  be  borrowed,  the  real 
borrowing  is  that  of  purchasing  power.  When  A  loans  the 
one  hundred  dollars  to  B,  the  latter  obtains  the  right  to  use 
purchasing  power  to  the  extent  of  the  loan;  and  A  gives 
up  that  right  until  some  future  date.  Business  men  of  all 
types  borrow  purchasing  power.  With  it  they  are  able  to 
build  factory  buildings  and  machines,  and  obtain  the  raw 
materials  and  other  supplies  needed  in  carrying  out  their 
business  plans;  and  the  lenders  lose  temporarily  the  right 
to  use  this  amount  of  purchasing  power. 

Banks.  The  business  of  a  bank  is  to  deal  in  credit.  It 
also  acts  as  a  safe  place  of  deposit  for  surplus  funds.  Instead 
of  each  person  putting  his  funds  at  night  under  the  pillow, 
in  the  cash  drawer,  or  in  a  private  safe,  the  cash  may  be  de- 
posited with  the  bank  and  the  right  to  draw  out  the  money 
as  needed,  acquired.  A  business  man  usually  deposits  each 
afternoon  before  the  bank  closes,  the  greater  portion  of  his 
receipts  for  the  day.  The  amount  of  this  deposit  will  be 
added  to  his  account  with  the  bank,  that  is,  to  his  deposit 
in  the  bank.  He  will  pay  his  bills  by  drawing  checks  upon 
the  bank.  His  check  orders  the  bank  to  pay  a  certain  sum 
to  the  order  of  his  creditor.  When  these  checks  reach  the 
bank,  the  amounts  called  for  are  paid  and  deducted  from  the 
business  man's  deposit.  In  this  way  checks  take  the  place 
of  money  and  economize  the  use  of  gold  and  silver.  A  draft 
is  a  bank's  check.  It  is  an  order  of  one  bank  to  another  to 
pay  a  sum  of  money  to  a  third  party.  The  first  bank  has  a 
deposit  in  the  second  bank  corresponding  to  the  deposit  the 
business  man  has  in  the  bank  upon  which  he  draws  a 
check. 

The  business  man  also  utilizes  the  bank  in  another  way. 
A  manufacturer  has  just  shipped  his  products  to  a  distant 


MONEY   AND   BANKING  95 

purchaser.  The  seUing  value  is  $10,000 ;  and  the  purchaser 
will  not  pay  for  the  goods  shipped  to  him  for,  say,  ninety 
days.  But  the  manufacturer  needs  to  pay  certain  bills 
now.  He  takes  the  bill  of  lading  issued  by  the  railway 
company  to  the  bank  and  draws  an  order  making  the  $10,000 
payable  to  the  bank  at  the  expiration  of  ninety  days ;  and 
the  company  to  which  the  shipment  was  made,  "  accepts" 
the  order.  The  bank  then  adds  to  the  manufacturer's 
deposit  with  the  bank,  $10,000  minus  the  interest  or  dis- 
count charged  by  the  bank,  —  say,  $150.  The  manufacturer 
can  now  pay  his  bills  by  checks  drawn  upon  his  account. 
The  bank  has  manufactured  credit  to  the  amount  of  $9850. 
Other  forms  of  security  or  of  commercial  paper,  such  as  a  note 
accompanied  by  adequate  securities,  are  also  accepted  by 
banks  for  discount.  The  transaction  just  outlined  is  typical 
of  the  business  of  a  bank.  The  bank  makes  its  profits 
very  largely  by  discounting  commercial  paper  of  various 
kinds. 

In  order  to  make  the  business  of  banking  clear  to  the 
student,  it  is  convenient  to  consider  the  organization  and 
business  of  a  small  bank.  A  bank  requires  capital  or  re- 
sources to  start  with  just  as  does  a  steel  plant  or  a  furniture 
factory.  A  group  of  men  take  shares  of  stock  in  the  bank 
which  is  incorporated.  The  shares  are  usually  one  hundred 
dollars  each.  If  the  number  of  shares  be  one  thousand,  the 
capital  paid  in  by  the  stockholders  and  available  for  business 
would  be  $100,000.  The  liabilities  of  the  bank  would  be 
$100,000  owed  to  the  stockholders,  and  the  resources  $100,000 
in  cash.  After  the  manufacturer  mentioned  in  the  preced- 
ing paragraph  comes  to  the  bank  with  his  commercial  paper, 
the  resources  and  liabilities  would  be  scheduled  in  the  follow- 
ing manner :  — 


96  ELEMENTARY   ECONOMICS 

lAabilities  Resources 

Capital $100,000         Cash $100,000 

Profits 150         Loans 10,000 

Deposits     ....  9,850  

$110,000  $110,000 

If  the  manufacturer  wishes  to  receive  a  portion  of  the  total, 
say  $5000,  in  cash,  the  statement  would  be  changed.  It 
would  then  read  as  below. 

Liahilities  Resources 

Capital $100,000         Cash $95,000 

Profits 150         Loans 10,000 

Deposits     ....  4,850 

$105,000  $105,000 

Profits  are  scheduled  as  liabilities  because  this  sum  is 
considered  as  owed  by  the  bank  to  its  stockholders.  The 
bank  owes  the  amount  of  its  deposits  to  the  depositors. 
Loans  are  resources  because  presently  that  sum  will  be  paid 
to  the  bank.  The  cash  on  hand  which  a  bank  keeps  is  called 
the  reserve.  After  a  bank  has  been  established  and  has  done 
business  for  some  time,  the  reserve  is  usually  fifteen  per  cent 
to  thirty  per  cent  of  its  deposits.  A  bank  "  makes  money  " 
by  loaning  its  capital  and  credit.  If  it  keeps  an  unnecessarily 
large  amount  of  cash  on  hand,  a  part  of  its  capital  is  idle  and 
is  making  no  profits  for  the  bank.  Ordinarily  a  bank  can 
safely  loan  out  all  of  its  funds  except  a  comparatively  small 
percentage  of  its  deposits  because,  except  in  emergencies,  on 
any  one  day  only  a  small  amount  of  cash  is  demanded  by 
its  customers.  A  "  run  on  the  bank  "  means  that  for  some 
reason  a  large  number  of  depositors  suddenly  demand  cash. 
And,  although  the  securities  held  by  the  bank  may  be  good, 
unless  the  bank  can  get  cash  from  some  other  bank,  it  may 
be  forced  to  close  its  doors  and  go  into  the  hands  of  a  re- 
ceiver. 


MONEY   AND   BANKING  97 

The  Clearing  House.  Since  checks  are  used  very  largely 
by  business  and  professional  men  to  pay  their  bills,  deposits 
made  in  bank  A  often  contain  checks  drawn  by  individuals 
having  deposits  in  other  banks.  Likewise,  other  banks  will 
each  day  receive  checks  drawn  upon  bank  A.  In  small 
towns  a  clerk  may  be  sent  from  bank  B  to  bank  A  with  all 
the  checks  deposited  that  day  in  bank  B  drawn  upon  bank  A. 
He  will  in  turn  receive  all  the  checks  deposited  in  bank  A 
drawn  upon  bank  B.  If,  for  example,  the  total  amount 
of  the  checks  drawn  on  bank  A  in  bank  B  is  greater 
than  the  amount  of  the  checks  in  bank  A  drawn  on  bank 
B,  bank  A  will  pay  the  difference  in  cash  or  its  equiva- 
lent to  bank  B.  In  large  cities,  this  daily  settlement  is 
made  in  a  clearing  house.  At  an  appointed  hour  a  repre- 
sentative of  each  important  bank  in  the  city  goes  to  the 
clearing  house  with  the  checks  which  his  bank  has  received 
drawn  upon  other  banks.  An  exchange  of  checks  takes 
place  and  the  balances  are  settled  at  the  clearing  house  under 
the  supervision  of  the  authorities  of  the  clearing  house. 

Banks  in  the  United  States.  In  the  United  States,  the 
chief  forms  of  banks  are :  federal  reserve  banks,  national 
banks,  state  banks,  savings  banks,  private  banks,  and  trust 
companies.  The  first  two  are  organized  and  operated  under 
federal  laws  and  are  subject  to  federal  control  and  inspection. 
The  remainder  are  subject  to  more  or  less  supervision  by 
state  authorities.  The  national  banks  and  the  federal  re- 
serve banks  may  under  definite  regulations  issue  paper  money. 
Other  forms  of  banks  in  the  United  States  do  not  issue  paper 
money.  The  national  banks  and  the  state  banks  do  the 
ordinary  commercial  business  which  has  already  been  ex- 
plained. There  are  twelve  federal  reserve  banks  in  as  many 
districts  into  which  the  United  States  has  been  divided  for 


98  ELEMENTARY   ECONOMICS 

this  purpose.  Every  national  bank  is  obliged  by  law  to 
own  stock  in  the  federal  reserve  bank  of  its  district ;  and 
part  of  its  reserves  are  placed  in  the  reserve  bank.  Certain 
state  banks  may  also  become  "  member  banks  "  of  the  federal 
system.  A  federal  reserve  bank  does  not  accept  the  de- 
posits of  individuals  nor  loan  to  individuals.  It  is  a  bank's 
bank.  The  federal  reserve  bank  may  rediscount  good  com- 
mercial paper  discounted  by  a  member  bank.  If  a  member 
bank  finds  its  reserves  so  low  in  respect  to  its  loans  that  it 
is  unwise  to  make  further  loans,  the  bank  may  send  part 
of  its  securities  to  the  reserve  bank.  The  reserve  bank  will 
rediscount  the  securities  and  send  the  bank  money  for  the 
securities.  With  the  money  thus  obtained  the  bank  in- 
creases its  reserves  and  will  then  be  able  to  accommodate 
more  customers  who  wish  loans.  The  federal  reserve  banks 
and  the  national  banks  are  under  the  control  of  a  Federal 
Reserve  Board  of  five  members  appointed  by  the  President. 
In  addition  to  the  five  appointed  members,  the  Secretary  of 
the  Treasury  and  the  Comptroller  of  the  Treasury  are  ex 
officio  members. 

Savings  banks  do  not  carry  on  a  commercial  banking  busi- 
ness ;  but  many  commercial  banks,  state  or  national,  have 
savings  departments.  Savings  banks  receive  deposits  of 
small  savings,  and  reinvest  them  in  long-time  securities. 
Savings  accounts  are  not  as  a  rule  subject  to  check.  Only  a 
small  percentage  of  reserves  is  kept  against  the  deposits  of 
savings  banks.  A  savings  bank  is  not  really  a  bank ;  it  is  an 
institution  for  the  profitable  investment  of  the  combined 
savings  of  many  individuals.  Trust  companies  were  origi- 
nally organized  to  take  charge  of  trust  funds  and  to  act 
as  administrators  of  estates;  but  many  perform  also  the 
functions  of  both  savings  and  commercial  banks.     Private 


MONEY  AND   BANKING  99 

banks  are  unincorporated  banks.  Private  banks  are  usually 
not  as  carefully  regulated  and  controlled  by  state  officials 
as  are  the  state  banks. 

Paper  Money  Issued  by  Banks.  Before  the  Federal 
Reserve  Act  was  passed  in  1913,  the  only  paper  money  issued 
by  American  banks  was  national  bank  notes.  The  federal 
reserve  banks  now  issue  federal  reserve  notes.  A  national 
bank  could  issue  paper  money  only  after  depositing  with  the 
Comptroller  of  the  Treasury  at  Washington,  United  States 
bonds  equal  to  the  amount  issued.  A  bank,  however,  could 
not  issue  paper  money  to  an  amount  exceeding  its  capital. 
The  bank  was  also  required  to  deposit  with  the  Comptroller 
an  additional  amount  in  cash  equal  to  five  per  cent  of  the 
bank-note  issue.  Each  dollar  of  paper  money  issued  by  the 
bank  was  therefore  protected  by  an  equal  amount  in  govern- 
ment bonds,  plus  five  cents  in  cash.  In  case  a  national  bank 
failed,  the  holders  of  its  paper  money  lost  nothing.  The 
Comptroller  sold  the  bonds  on  deposit  and  redeemed  the 
bank  notes  issued  by  that  particular  bank. 

National  bank  notes,  as  well  as  the  forms  of  money  issued 
directly  by  the  United  States  government,  were  said  to  be 
inelastic.  The  amount  issued  and  in  circulation  did  not 
vary  much  from  time  to  time  during  the  year.  However, 
at  certain  times  in  the  year,  in  the  autumn,  for  example, 
more  money  is  needed  in  circulation  than  at  other  times.  In 
1908,  an  act  was  passed  for  the  purpose  of  giving  some 
elasticity  to  the  monetary  system;  but  it  accomplished 
very  little.  The  Federal  Reserve  Act  of  1913  had  as  one 
of  its  important  objects  that  of  giving  the  needed  elasticity. 
This  is  accomplished  by  allowing  the  federal  reserve  banks 
to  issue  federal  reserve  notes  upon  the  security,  not  of 
government   bonds,  but  of  the   rediscounted    commercial 


100  ELEMENTARY   ECONOMICS 

paper  which  these  banks  have  received  from  member  banks. 
The  payment  made  to  member  banks  for  the  securities 
offered  for  rediscount  may  be  made  in  the  notes  thus  issued. 
For  example,  a  national  bank  in  Detroit  sends  $50,000  of 
acceptable  short-time  securities  to  the  Federal  Reserve 
Bank  in  Chicago  to  be  rediscounted.  The  Federal  Reserve 
Bank  may  now  issue  an  additional  amount  of  paper  money, 
federal  reserve  notes,  upon  the  rediscounted  paper  as  se- 
cmty.  A  reserve  bank  may  also  issue  notes  upon  other 
assets  or  resoiu'ces  of  the  bank.  A  gold  reserve  must  be 
maintained  to  provide  for  the  redemption  of  the  paper 
money  issued  by  the  bank;  and  provisions  are  made  for 
retiring  the  notes  from  circulation  when  less  money  is 
needed.  In  this  manner,  our  currency  has  been  given  a 
desirable  degree  of  elasticity.  It  is  expected  that  sooner 
or  later  the  national  banks  will  cease  issuing  paper  money. 
The  new  bonds  issued  in  1917  and  1918  cannot  be  used  as  the 
basis  of  national  bank-note  issues. 

SUGGESTIONS  TO   TEACHER 

Obtain  a  blank  check  and  several  canceled  checks. 
Also,  a  draft. 

Get  a  statement  of  resources  and  liabilities  from  a  bank  or  out  of 
a  newspaper  or  financial  journal.     Discuss. 
Show  different  kinds  of  United  States  money. 


CHAPTER  XI 
FORMS   OF  BUSINESS   ORGANIZATION 

The  Nature  of  Business.  Business  in  its  many  forms  is 
carried  on  primarily  to  make  profits  or,  according  to  popular 
phraseology,  to  make  money.  The  average  business  man 
works  hard  in  order  to  make  profits.  He  is  interested  in 
producing  commodities  for  the  consumer  only  in  so  far  as  by 
producing  goods  he  can  add  to  his  profits.  If,  by  producing 
or  selling  a  smaller  quantity  of  commodities,  larger  net 
profits  can  be  made  than  by  producing  or  selling  greater 
quantities  of  commodities,  the  former  method  of  pro- 
cedure will  normally  be  followed.  In  short,  the  business 
man  is  particularly  interested  in  buying  and  selling,  in  profits 
and  prices,  in  contracts  and  credits;  he  is  interested  only 
as  a  means  to  an  end,  in  the  technical  processes  of  manu- 
facturing or  of  mining,  or  in  the  plans  for  easing  the  burdens 
of  the  wageworker.  The  business  man  is  not,  however, 
superlatively  selfish ;  he  is  quite  like  other  members  of  the 
community.  But  "  business  is  business  " ;  it  is  not  play 
nor  philanthropy.  The  business  man  is  busily  engaged  in 
getting  a  living  and  more  for  himself  and  his  family. 

Consumers  desire  large  quantities  of  commodities  pro- 
duced and  marketed ;  they  demand  low  prices,  which  often 
mean  a  dearth  of  profits.  The  divergent  points  of  view  of 
the  producers  and  the  consumers  of  a  given  product  can 
easily  be  illustrated  out  of  the  experience  of  the  student. 
For  example,  if  you  are  engaged  in  the  poultry  business,  you 
are  pleased  when  the  price  of  eggs  rises  and  your  profits 

101 


lb2''        >  ' '    'iiLEMENTARY   ECONOMICS 

inci^ea'se/ ' 'However,  "y6u  wish  the  price  of  feed  for  the 
poultry  to  remain  low.  And  as  a  small  business  man 
selling  eggs,  you  would  prefer  to  sell  eggs  at  fifty  cents  a 
dozen  when  your  hens  were  laying  few  eggs  per  week  rather 
than  at  twenty  cents  a  dozen  even  though  your  hens  were 
laying  twice  as  many  eggs  per  week.  But,  on  the  other 
hand,  if  you  must  buy  eggs  from  your  neighbor  or  the  grocery 
store,  you  are  not  displeased  to  learn  that  the  number  of 
eggs  on  the  market  has  increased  and  as  a  consequence  the 
price  has  been  reduced.  This  simple  illustration  throws 
considerable  light  upon  the  processes  of  the  business  world 
and  upon  the  aims  of  the  business  man  and  of  the  consumer. 

The  Single  Enterpriser.  The  business  world  is  composed 
of  various  forms  of  business  organizations  or  profit-seeking 
units.  The  chief  forms  are  the  single  enterpriser,  the  partner- 
ship, the  corporation,  the  cooperative  establishment,  and 
governmental  enterprise.  The  simplest  kind  of  business 
organization  is  the  single-enterpriser  form.  One  individual 
is  responsible  for  the  business.  He  is  the  sole  owner ;  and  he 
usually  manages  the  business  himself.  The  single  enter- 
priser may  or  may  not  hire  others  to  work  for  him.  Nearly 
all  American  farms  are  single-enterpriser  establishments; 
and  many  small  retail  stores  and  small  shops  are  also  of  this 
type.  The  owner  is  directly  responsible  for  the  debts  of  the 
business;  his  liability  is  said  to  be  unlimited.  All  the 
property  he  possesses  may  be  seized  in  case  of  business 
failure.  Only  small  kinds  of  businesses,  not  requiring  large 
amounts  of  capital,  are  suitable  for  this  form  of  business 
organization. 

The  Partnership.  Two  or  more  individuals  may  associate 
together  to  form  a  partnership.  The  members  of  the  partner- 
ship or  firm  are  each  personally  responsible  for  the  debts 


FORMS   OF   BUSINESS   ORGANIZATION  103 

of  the  firm.  Each  partner  is  usually  placed  in  charge  of 
the  part  of  the  business  for  which  he  is  specially  qualified. 
More  capital  can  be  obtained  than  by  the  single-enterpriser 
form.  The  partnership  is  found  in  many  mercantile  and 
professional  businesses.  Up  to  the  time  of  the  Civil  War, 
the  single-enterpriser  and  the  partnership  were  the  most 
important  forms  of  business  organization.  In  recent  years, 
the  growing  size  of  the  business  unit  has  caused  the  corporate 
form  to  become  predominant  in  the  American  business 
world. 

The  Corporation.  Because  of  its  great  importance,  careful 
consideration  must  be  given  to  the  corporate  form  of  business 
organization.  About  four-fifths  of  the  value  of  all  our  manu- 
factured products  are  produced  by  corporations.  All  of 
our  railways  and  nearly  all  of  American  banks,  insurance 
companies,  and  important  mining  companies,  are  operated 
by  corporations.  Big  business  is  to-day  managed  by  corpora- 
tions. 

The  corporation  is  created  by  governmental  action.  A 
corporation  is  organized  by  granting  a  charter  to  a  group  of 
persons.  In  the  United  States,  charters  are  granted  by  the 
state  governments ;  and  the  laws  of  the  various  states  differ 
considerably  in  regard  to  incorporation.  Legally  considered, 
a  corporation  is  an  artificial  person;  it  may  make  con- 
tracts, sue,  and  be  sued  as  may  a  natural  person.  The 
persons,  similar  to  partners  in  a  partnership,  connected 
with  a  corporation  are  called  stockholders.  When  the 
corporation  is  organized  and  its  charter  granted,  it  issues 
shares  of  stock.  These  shares  are  usually  of  the  par  or 
nominal  value  of  one  hundred  dollars  each.  If  the  capitaliza- 
tion is  placed  at  $100,000,  1000  shares  would  be  issued. 
A  stockholder  may  own  one  or  many  of  these  shares.     The 


104  ELEMENTARY  ECONOMICS 

original  stockholders  do  not  always  pay  full  or  par  value 
for  their  stocks.  In  that  case  the  stock  is  said  to  be 
**  watered."  If  the  1000  shares  of  the  corporation  mentioned 
above  were  sold  to  the  stockholders  at  $50  each,  the  actual 
capital  of  the  corporation  would  be  $50,000  instead  of 
$100,000,  —  the  par  value  of  all  the  stock.  The  stock 
would,  under  these  conditions,  be  fifty  per  cent  "  water.'* 
The  stockholders  elect  certain  of  their  number  to  be  directors 
of  the  corporation.  In  voting  for  directors,  each  stockholder 
is  allowed  as  many  votes  as  he  owns  shares.  The  directors 
select  the  president  and  other  important  administrative 
officers.  In  case  the  corporation  fails,  a  stockholder  is 
financially  liable  only  for  the  amount  paid  in  to  obtain  his 
shares.  His  other  property  cannot  be  taken  to  pay  the 
debts  of  the  corporation.  In  this  respect  the  corporation 
differs  from  the  partnership. 

Bonds.  Very  often  corporations  obtain  part  of  their 
capital  by  issuing  bonds.  A  bond  is  a  mortgage  on  the 
property  or  the  income  of  the  company.  In  this  country, 
it  is  almost  invariably  a  mortgage  on  the  property.  A 
bondholder,  unlike  a  stockholder,  does  not  have  a  voice  in 
choosing  directors  or  in  determining  the  policy  of  the  corpo- 
ration. A  bond,  however,  draws  a  definite  rate  of  interest. 
This  interest  must  be  paid  before  any  profits  may  be  paid 
to  the  stockholders,  that  is,  before  dividends  may  be  de- 
clared and  paid.  If  the  interest  is  not  paid,  the  bond- 
holders may  ask  a  court  of  proper  jurisdiction  to  declare 
the  company  insolvent,  and  to  place  the  business  in  the  hands 
of  a  receiver.  The  receiver  will  either  close  up  the  affairs 
of  the  corporation  and  pay  as  far  as  possible  the  creditors 
including  the  bondholders,  or  he  may  operate  the  business 
until  it  is  on  a  firmer  financial  basis.     In  the  latter  case. 


FORMS   OF   BUSINESS   ORGANIZATION  105 

sooner  or  later  the  stockholders  will  again  obtain  control  of 
the  business. 

In  the  case  of  a  corporation  manufacturing  automobiles, 
from  the  total  or  gross  amount  received  for  the  automobiles 
sold  in  a^  given  year  must  be  deducted  the  expenses  of 
operating  the  plant,  —  wages,  raw  material,  fuel,  and  the 
like.  Interest  on  the  bonds,  taxes,  and  insurance  must  also 
be  paid.  After  the  current  expenses  are  paid,  an  amount 
must  be  set  aside  for  repairs  and  depreciation  due  to  wear 
and  tear  upon  the  equipment  of  the  plant.  After  all  these 
deductions  have  been  made  from  the  gross  income,  the  re- 
mainder, if  such  there  be,  belongs  to  the  stockholders.  It 
may  all  be  divided  among  them  in  dividends  in  proportion 
to  the  number  of  shares  owned  by  each  stockholder ;  or,  as 
is  usually  the  case  with  corporations  whose  financial  standing 
is  good,  part  may  be  held  by  the  company  as  a  surplus,  and 
dividends  declared  out  of  the  remainder  only.  The  surplus 
may  be  used  to  enlarge  the  plant  or  for  investment  in  other 
businesses. 

The  income  from  investments  in  bonds  is  small  but  com- 
paratively certain.  The  income  derived  from  the  owner- 
ship of  corporation  stocks  is  much  more  uncertain.  It  may 
be  considerable ;  but,  if  no  profits  are  made,  dividends  can- 
not be  declared.  The  interest  rate  is  always  specified  in 
the  bond ;  but  there  is  no  definite  dividend  rate.  However, 
certain  stocks  called  preferred  stock  bear  a  definite  dividend 
rate,  provided  sufficient  profits  are  made.  The  remaining 
surplus,  if  any,  may  be  paid  to  the  holders  of  common  stock. 

Since  a  very  large  portion  of  the  business  of  the  nation  is 
performed  by  corporations,  it  may  be  inferred  that  the 
corporate  form  of  business  organization  is  superior  in  certain 
important  respects  to  the   single-enterpriser  form  or  the 


106  ELEMENTARY   ECONOMICS 

partnership.  The  corporation  continues  although  its  original 
stockholders  die  or  sell  their  shares  to  others.  Under  similar 
conditions  a  reorganization  of  a  partnership  would  be 
necessary.  The  corporation  can  easily  get  large  amounts 
of  capital  from  many  sources.  The  liability  of  a  stockholder 
is  limited  to  the  amount  paid  into  the  treasury  of  the  com- 
pany. Lastly,  it  is  comparatively  easy  to  change  the  officers 
and  managers  of  a  corporation. 

One  of  the  chief  disadvantages  of  the  corporate  form  of 
business  management  grows  out  of  the  fact  that  very  few 
of  the  many  stockholders  of  a  large  corporation  take  an 
active  interest  in  the  affairs  of  their  company.  They  are 
satisfied  if  dividends  are  regularly  paid.  M|iny  stock- 
holders of  western  railways,  for  example,  have  never  seen 
the  road  of  which  they  are  part  owners.  Much  of  corpora- 
tion ownership  is  absentee  ownership.  Again,  many  corpora- 
tions secured  their  capital  very  largely  by  the  sale  of  bonds. 
The  stock  represents  little  or  no  money  actually  paid  in. 
The  stock  is  "  watered."  The  company  hopes,  because  of 
some  unusual  opportunity,  to  make  large  profits  and  to  be 
able  to  pay  dividends  upon  stock  which  represents  no  ac- 
tual investment.  The  bondholders  who  have  furnished  the 
capital  have  no  voice  in  the  management  of  the  business. 
The  organizers  or  promoters  of  the  corporation  who  have 
paid  nothing  for  their  stock  control  the  business  and  may 
reap  unusually  large  returns.  On  the  other  hand,  if  the 
project  proves  to  be  a  failure,  they  have  lost  little  or  nothing. 
Other  abuses  or  disadvantages  of  the  corporation  exist. 

The  Trust.  Large  corporations  or  combinations  of  cor- 
porations, having  some  measure  of  monopoly,  are  called,  in 
popular  language,  trusts.  The  word,  ''  trust,"  used  in  this 
manner  cannot  be  accurately  defined.     The  Standard  Oil 


FORMS   OF  BUSINESS   ORGANIZATION  107 

Company  and  the  United  States  Steel  Corporation  are  often 
called  trusts.  The  latter  company  owns  the  stock  of  many 
subsidiary  companies;  it  is  a  combination  or  a  group  of 
corporations.  Trusts  or  large  combinations  arise  in  order 
to  secure  the  advantages  of  large-scale  business  and  to  stifle 
competition,  thus  enabling  the  trust  in  some  degree  to  limit 
output  and  control  prices.  In  so  far  as  combination  means 
efficient  production  and  the  elimination  of  waste,  it  is  de- 
sirable ;  but  in  so  far  as  it  leads  to  monopolistic  control, 
higher  prices,  and  extraordinary  profits,  competition  is  unde- 
sirable from  the  point  of  view  of  the  consumer. 

The  American  people  are  quite  definitely  committed  to  the 
policy  of  r^egulating  trusts.  The  federal  government  and 
nearly  all  of  the  forty-eight  states  have  passed  anti-trust 
legislation.  The  earlier  acts  aimed  to  smash  trusts  and  to 
force  a  return  to  the  earlier  form  of  small-scale  business. 
These  laws  have  not  fulfilled  their  mission.  Recent  legis- 
lation recognizes  the  unmistakable  trend  toward  large- 
scale  or  "  trustified  "  business,  and  attempts  to  prevent  "  un- 
fair "  methods  of  crippling  small  competitors.  The  Federal 
Trade  Commission,  established  in  1914,  has  the  power  to 
investigate  the  affairs  of  large  industries  doing  an  interstate 
business,  and  to  require  reports  from  such  corporations. 
The  Commission  also  has  been  given  the  authority  to  issue 
orders  restraining  a  corporation  from  using  "  unfair  methods 
of  competition  in  commerce."  In  a  considerable  degree, 
the  Commission  has  the  power  to  determine  what  are  and 
what  are  not  "  unfair  "  competitive  methods. 

Cooperation.  This  form  of  business  organization  is  a 
marked  departure  from  the  three  forms  which  have  been 
considered.  In  a  manufacturing  plant  operated  under  the 
cooperative  plan,  the  workers  in  the  industry  would  control 


108  ELEMENTARY   ECONOMICS 

the  plant  and  choose  the  managers.  Each  worker  would 
have  one  and  only  one  vote.  The  capital  necessary  would 
be  furnished  by  the  workers  or  borrowed  from  outside  parties. 
The  profits  or  **  savings  '*  are  divided  among  the  workers 
or  cooperators.  This  form  of  cooperation  has  had  very 
little  success  up  to  date.  The  cooperative  store  has  attained 
greater  success.  The  purchasers  join  together  and  control 
the  store.  Each  purchaser  or  cooperator  has  only  one  vote. 
Herein,  the  cooperative  establishment  differs  radically  from 
the  corporation.  The  cooperative  establishment  is  a  demo- 
cratic form  of  business  organization.^ 

Governmental  Enterprise.  Various  governmental  units 
in  this  and  other  countries  manage  certain  business  enter- 
prises. Ordinarily  such  enterprises  are  not  carried  on  for 
profits.  The  aim  is  to  keep  rates  low,  pay  fair  wages,  and 
provide  good  service.  In  this  country,  a  large  percentage 
of  the  city  water  plants  are  owned  and  operated  by  the 
municipalities.  Many  gas  and  electric  lighting  plants  are 
also  under  municipal  management .  ^  The  federal  government 
operates  the  mint  and  the  post-office.  Over  one  half  of  the 
steam-railway  mileage  of  Europe,  Asia,  Africa,  and  Australia 
is  owned  by  governmental  units;  but  on  the  American 
continent  private  ownership  of  railways  is  almost  universal. 

^  Cooperation  is  discussed  at  greater  length  in  the  chapter  on  Methods 
of  Paying  for  Labor. 

>  See  also  the  chapter  on  Municipal  Monopolies. 


CHAPTER  XII 
RAILWAY  TRANSPORTATION 

The  Importance  of  the  Railway.  Regular,  rapid,  and  safe 
means  of  transportation  is  essential  to  modern  complex 
civilization.  Interstate  and  international  trade,  minute 
division  of  labor,  world  markets,  and  great  corporations  are 
dependent  upon  excellent  means  of  communication  and 
transportation.  Railways  are,  indeed,  the  arteries  of  the 
bushiess  world.  Stop  the  movement  of  the  freight  trains, 
and  business  activities  stop  also.  Thanks  to  the  railway 
and  the  steamship,  different  parts  of  the  nation  and  of  the 
world  can  exchange  products,  and  men  are  no  longer  restricted 
in  their  consumption  to  the  products  of  the  locality  in  which 
they  live.  The  manufacturing  city  gets  its  food  supply 
with  the  aid  of  the  railway  and  steamship  from  distant 
Dakota,  California,  or  Cuba;  its  iron  ore  from  the  Lake 
Superior  district  and  its  cotton  from  the  South. 

The  political  significance  of  transportation  as  well  as  its 
industrial  or  economic  importance  cannot  easily  be  over- 
emphasized. The  modern  nation  is  literally  tied  together 
by  the  heavy  steel  rails  of  the  railway  and  the  wires  of  the 
telegraph  and  the  telephone.  The  steamship,  the  submarine, 
and  the  airship  are  eliminating  the  isolation  caused  by  the 
ocean.  The  World  War  has  conclusively  proved  to  the 
American  people  that  we  can  no  longer  live  in  political  and 
economic  isolation  from  the  rest  of  the  world. 

The  railway  industry  is  one  of  the  largest  in  the  United 
States.     Nearly  two  million  workers  are  employed  by  our 

109 


110  ELEMENTARY   ECONOMICS 

railways.  It  is  probable  that  twenty  billion  dollars  are  in- 
vested in  the  American  network  of  railways,  —  approxi- 
mately equal  to  the  amount  invested  in  manufacture.  Over 
one  third  of  the  railway  mileage  of  the  world  has  been  built 
in  the  United  States.  Because  of  its  magnitude,  and  its 
economic  and  political  importance,  the  railway  problem  is 
one  worthy  of  careful  investigation. 

Growth  of  the  American  Railway.  The  pioneer  American 
railway  using  the  steam  locomotive  was  the  Baltimore  and 
Ohio.  Construction  work  began  in  1828;  and  thirteen 
miles  were  completed  in  1830.  The  mileage  of  the  American 
railways  has  increased  rap  dly.  In  1860,  the  total  mileage 
had  risen  to  over  30,000 ;  in  1880,  to  over  93,000 ;  in  1890, 
to  over  163,000;  in  1910,  to  240,000;  and  in  1914,  to 
252,231.  The  first  railways  were  short;  and,  as  different 
widths  of  track  were  used  by  different  roads  it  was  impossible 
to  transfer  cars  from  one  road  to  another.  A  standard  gauge 
was  soon  adopted;  and  the  consolidation  of  companies 
followed.  In  1915,  five  large  groups  controlled  over  one 
half  of  the  railway  mileage  of  the  United  States  The  largest 
of  these  groups,  "  the  Union  Pacific  Southern  Pacific 
interests,"  controlled  34,500  miles,  —  a  total  greater  than 
the  mileage  of  all  American  railways  when  Abraham  Lincoln 
was  inaugurated  President  of  the  United  States.  Under  the 
pressure  of  the  exigencies  of  the  war  in  1917,  the  railways 
were  operated  practically  as  a  unit.  This  step  may  point 
the  way  toward  permanent  unification  of  the  railway  business 
under  one  control,  private  or  public. 

The  Railway  Is  a  Monopolistic  Business.  The  railway, 
the  telegraph,  public  utilities,  such  as  water,  gas,  and  electric 
lighting  plants  and  street  railways,  and  possibly  the  telephone 
system,  have  certain  common  characteristics.     These  busi- 


RAILWAY   TRANSPORTATION  »     111 

nesses  may  be  classified  as  monopolies  of  organization. 
With  the  possible  exception  of  the  telephone,  the  expenses 
of  operation  per  unit  of  service  tend  to  decrease  as  the  amount 
of  business  performed  increases.  In  each,  the  amount  of 
fixed  expense  is  considerable.  A  railway  must  have  its  rails, 
roadbed,  depots,  and  signaling  devices  whether  few  or  many 
trains  are  operated  each  day.  It  also  costs  very  little  more 
to  run  a  train  of  well-laden  cars  than  it  does  to  run  a  shorter 
train  containing  many  empty  cars.  Certain  expenses  are 
almost  independent  of  the  number  of  trains  operated  per  day 
or  of  the  number  of  cars  per  train.  It  has  been  established 
by  competent  authority  that  two  thirds  of  the  total  ex- 
penditures of  a  railway  are  for  fixed  expenses,  and  only  one 
third  for  expenses  which  vary  with  the  traffic. 

The  manager  of  a  business  of  decreasing  costs  and  large 
fixed  expenses  is  peculiarly  tempted  to  get  more  business. 
If  one  railway  parallels  another,  each  manager  will  strive 
to  get  all  the  traffic  he  can.  Unless  regulated  by  the  govern- 
ment, rate  cutting  will  follow.  It  is  to  the  advantage  of  the 
railway  to  get  more  traffic  even  though  additional  business 
pays  little  more  than  the  added  cost  of  carrying  it.  A  simple 
example  from  a  transportation  business  having  a  smaller 
percentage  of  fixed  expenses  than  the  railway,  will  illustrate 
the  problem  of  the  traffic  manager.  Suppose  that  two  men 
A  and  B  are  each  transporting  butter  and  eggs  by  motor- 
truck from  a  rural  district  to  the  neighboring  city.  Neither 
one  is  able  to  obtain  a  full  load  each  day.  A  finds  that 
farmer  X  who  patronizes  B  is  sending  an  amount  each  day 
which,  if  added  to  A's  load  would  give  the  latter  all  he  could 
readily  carry.  A  secretly  cuts  the  rate  or  gives  a  rebate  to 
X,  and  gets  the  traffic.  It  costs  A  but  little  more  to  carry 
the  additional  load,  as  his  truck  is  making  the  trip  daily. 


112  ELEMENTARY   ECONOMICS 

B  loses  the  traffic  and  finds  his  load  still  further  reduced. 
He,  in  turn,  secretly  cuts  rates  and  thus  obtains  some  of 
A's  customers.  Presently  a  fierce  rate  war  is  on.  Butter 
and  eggs  are  carried  at  very  low  rates.  Both  truck-men  lose. 
Presently,  they  make  an  agreement  in  regard  to  the  division 
of  the  traffic  and  rates  are  raised.  Or,  perhaps,  one  sells  out 
to  the  other.  This  course  of  events  has  been  followed  in  the 
railway  business.  Competition  of  parallel  lines  is  wasteful 
and  futile.  Unrestricted  and  unregulated  competition  soon 
leads  to  agreements  and  to  combinations,  —  in  short,  to 
monopoly. 

The  railway  having  large  fixed  expense  and  being  a  business 
of  decreasing  expense  of  operation,  is,  therefore,  an  industry 
in  which  the  manager  is  subjected  to  temptations  which  do 
not  greatly  affect  the  manager  of  a  grocery  store.  Extra 
business  implies  larger  profits;  and  the  manager  is  often 
tempted  to  give  special  favors  to  get  shipments  over  his  line. 
On  the  other  hand,  the  law  now  requires  the  railway  to  treat 
all  shippers  alike.  The  special  favors  or  discriminations 
which  railway  managers  are  tempted  to  offer  are  personal, 
place,  and  commodity.  The  illustration  just  considered  was 
one  of  personal  discrimination.  Sometimes  large  shippers 
have  forced  discriminations  in  their  favor  by  threatening 
to  send  all  of  their  shipments  over  another  route.  The 
traffic  manager  was  driven  to  discriminate  in  their  favor  or 
lose  the  traffic. 

Place  discrimination  consists  in  giving  more  favorable  rates 
to  a  town,  a  city,  or  a  district  than  is  given  to  other  towns, 
cities,  or  districts.  If  two  sections  of  the  country  are  pro- 
ducing the  same  products  for  the  market,  rates  slightly  dis- 
criminating in  favor  of  one  section  will  make  it  easy  for  that 
section  to  undersell  its  competitors.     The  favored  district 


RAILWAY   TRANSPORTATION  113 

will  be  prosperous;  the  others  will  feel  the  pinch  of  hard 
times.  Unregulated  railways  have  the  power  to  build  up  or 
to  destroy  a  city  by  fixing  freight  rates. 

The  other  side  of  the  problem  must  not,  however,  be  over- 
looked. If  a  town  or  a  district  has  the  option  of  sending  its 
products  by  water  as  well  as  by  rail,  the  railway  must  lower 
its  rates  to  and  from  that  district  or  lose  much  of  the  traffic. 
And,  because  of  the  high  percentage  of  fixed  expenses,  it  is 
more  profitable  to  get  the  traffic  from  the  seaport  town  at 
low  rates  paying  more  than  the  variable  expenses,  than  it  is 
to  lose  the  traffic.  It  may  even  be  to  the  advantage  of  the 
inland  towns  discriminated  against.  But,  of  course,  not 
all  place  discriminations  are  justifiable.  The  Interstate 
Commerce  Commission  has  held  that  some  place  discrimina- 
tions are  justifiable. 

Discriminations  in  regard  to  commodities  are  encouraged 
under  governmental  regulations.  All  railways  have  intricate 
classifications  of  freight.  Goods  which  are  valuable  are 
classified  higher  and  pay  higher  rates  per  mile  than  cheap 
and  bulky  products.  Such  articles  as  grain,  coal,  iron  ore, 
and  gravel  are  charged  low  rates,  and  do  not  pay  their 
share  of  the  fixed  expenses.  If,  however,  high  rates  were 
charged  for  coal,  the  amount  carried  would  be  greatly  re- 
duced, and  manufacturing  plants  using  coal  in  the  production 
of  articles  which  will  bear  higher  rates  would  be  adversely 
affected. 

The  motive  which  primarily  impelled  traffic  managers  to 
classify  freight  can  be  simply  illustrated  by  again  consider- 
ing the  case  of  a  motor-truck  carrying  butter  and  eggs.  If 
ordinarily  the  entire  capacity  of  the  truck  was  not  utilized, 
the  driver  would  find  it  advantageous  to  fill  the  space  with 
some  other  product,  even  though  the  latter  must  be  carried 


114  ELEMENTARY   ECONOMICS 

at  a  low  rate.  A  low  rate  per  pound  might  be  given  to 
potatoes.  If  the  same  rate  were  charged  as  for  butter,  it 
would  not  be  profitable  for  the  farmer  to  send  potatoes  by 
this  particular  motor-truck.  But,  since  the  truck  is  making 
the  trip,  some  extra  profits  can  be  obtained  by  filling  up  the 
extra  space  with  potatoes  paying  a  rate  but  little  more  than 
the  extra  expense  of  carrying  this  cheaper  and  bulkier  prod- 
uct. The  railway  traffic  manager  finds  himself  in  a  similar 
position.  Classification  is  not  legally  considered  to  con- 
stitute discrimination. 

Regulation  or  Public  Ownership.  Railways  are  monop- 
olies of  organization,  and  should  be  recognized  as  such. 
Since  the  railway  is  a  business  of  increasing  returns  or  dimin- 
ishing expenses,  the  temptation  to  allow  personal  and  place 
discrimination  is  strong.  And  this  signifies  that  govern- 
mental regulations  must  be  utilized  to  fix  rates  and  to  de- 
termine many  of  the  conditions  of  operation;  or,  as  an  al- 
ternative, the  government  must  take  over  the  railway  in- 
dustry and  operate  it  as  a  governmental  enterprise.  Com- 
petition cannot  be  relied  upon ;  the  choice  of  necessity  lies 
between  governmental  regulation  or  governmental  owner- 
ship. The  United  States  tested  for  thirty  years,  from  1887 
to  1917,  the  policy  of  regulating  railways. 

The  Regulation  of  Railways.  Under  the  federal  con- 
stitution the  regulation  of  interstate  commerce  is  vested 
in  the  federal  government;  but  the  control  of  the  intra- 
state traffic  is  a  function  of  the  state  government.  With 
the  growth  of  big  business  and  of  wide  market  areas,  inter- 
state commerce  has  grown  to  huge  proportions.  The  more 
important  form  of  regulation  is  that  placed  in  the  hands  of  the 
federal  government.  The  federal  government  and  forty- 
six  of  the  forty-eight  states  have  laws  providing  for  the 


RAILWAY   TRANSPORTATION  115 

regulation  of  railways  by  means  of  some  form  of  commission. 
The  state  commissions  vary  greatly  in  the  extent  of  their 
powers  and  in  efhciency.  The  federal  act  providing  for  the 
Interstate  Commerce  Commission  was  passed  in  1887;  it  has 
been  amended  and  strengthened  several  times.  The  two 
fundamental  principles  upon  which  both  the  state  and 
federal  legislation  rest  are :  (1)  railway  rates  must  be  reason- 
able and  (2)  discriminations  must  cease. 

In  1917,  the  Interstate  Commerce  Commission  consisted 
of  seven  members  appointed  by  the  President  and  confirmed 
by  the  Senate.  Under  its  jurisdiction  were  placed  the  inter- 
state traffic  of  steam  and  electric  railways,  telegraph,  tele- 
phone, and  cable  lines,  pipe  lines,  express  and  sleeping  car 
companies.  The  statutes  provide  that  all  railway  rates 
must  be  reasonable;  but  no  definite  standard  is  offered  for 
measuring  fairness  or  reasonableness.  The  Commission  is 
now  engaged  in  the  formidable  undertaking  of  making  a 
valuation  of  the  physical  property  of  the  railways.  The 
theory  underlying  this  effort  is  that  rates  should  be  such  as 
to  give  a  fair  return  upon  the  tangible  property  of  the  com- 
panies. Many  grave  and  intricate  problems,  which  cannot 
be  here  discussed,  however,  arise  in  connection  with  this 
hypothesis. 

Discriminations  between  persons  or  places  are  prohibited ; 
and  the  giving  or  receiving  of  rebates  is  likewise  placed  under 
the  ban.  It  is  unlawful  to  charge  more  for  a  short  than  for 
a  long  haul  over  the  same  line  and  in  the  same  direction,  — 
unless  permission  is  granted  by  the  Commission.  Pooling 
or  the  division  between  two  or  more  railways,  by  agreement, 
of  the  freight  traffic  or  of  the  sums  received  from  the  shipper, 
is  prohibited.  Uniform  bookkeeping  is  required  and  reports 
must  be  made  annually  to  the  Commission.     Rates  to  be 


116  ELEMENTARY   ECONOMICS 

charged  must  be  filed  with  the  Commission  and,  as  a  matter 
of  actual  practice,  rates  cannot  be  raised  without  the  con- 
sent of  the  Commission.  The  Commission  has  the  power 
to  fix  maximum  rates  for  a  period  of  two  years.  All  orders 
of  the  Commission  are  subject  to  court  review  and  may  be 
set  aside  by  order  of  the  court. 

The  Adamson  Act,  passed  in  1916,  fixed  the  length  of  the 
standard  working  day  on  interstate  railways  at  eight  hours. 
In  effect,  the  law  also  established  a  rate  of  wage  payment. 
The  Supreme  Court  of  the  United  States  upheld  the  con- 
stitutionality of  the  Adamson  law.  The  court  also  sug- 
gested in  its  decision  that  compulsory  arbitration  was  a  legal 
method  of  settling  labor  disputes  in  the  railway  industry. 
The  contrast  between  the  rights  of  a  railway  corporation 
and  those  allowed  to  the  owner  of  a  small  manufacturing  or 
mercantile  business,  is  striking.  Railway  rates  are  prac- 
tically fixed  by  a  commission;  hours  of  labor,  the  use  of 
safety  appliances,  and  even  wage  rates  are  subject  to  out- 
side regulation ;  and  the  government  apparently  may  settle 
by  arbitration  all  disputes  between  the  railway  as  an  em- 
ployer of  labor  and  its  employees.  Surely,  the  old,  much- 
lauded  right  to  run  one's  business  without  interference  is 
out  of  date  in  the  semi-public  railway  industry  even  in  times 
of  peace. 

An  additional  reason  for  asserting  the  right  of  the  govern- 
ment to  regulate  railways  is  found  in  the  grant  to  the  rail- 
ways of  the  right  of  eminent  domain.  By  the  use  of  this 
legal  weapon,  the  railway  can,  if  necessary,  condemn  property 
for  its  right  of  way.  Without  this  right,  railways  would  find 
it  difficult,  if  not  impossible,  to  obtain  the  land  necessary 
to  lay  their  tracks.  Some  one  property  owner  might  block 
the  project  by  refusing  to  sell  his  property.     From  1850  to 


RAILWAY   TRANSPORTATION  117 

1870  the  federal  government  also  aided  railways  by  giving 
them  as  land  grants,  millions  of  acres  of  land. 

Regulation  by  commissions  has  been  given  a  thirty-years 
trial  in  this  country.  It  must  be  conceded  by  the  unpreju- 
diced observer  that  the  experiment  has  not  been  an  un- 
mitigated success.  From  time  to  time,  weaknesses  have 
been  found,  and  new  legislation  passed  to  remedy  the  evils. 
The  power  of  the  Interstate  Commerce  Commission  has 
been  steadily  growing;  and  it  is  to-day  a  dignified  body  of 
experts.  Nevertheless,  the  railways  in  recent  years  were 
finding  it  more  and  more  difficult  to  borrow  capital  for  needed 
additions  to  the  equipment  of  the  roads.  In  the  fall  of  1916 
and  the  spring  of  1917,  the  railways  were  clearly  unable  to 
handle  the  traffic  with  a  reasonable  degree  of  efficiency. 
The  next  step  may  be  permanent  governmental  ownership  and 
operation  of  railways.  Such  a  step  would  be  in  the  direction 
already  taken  by  many  European  countries. 

In  1917,  the  railways  of  the  United  States  were  operated 
under  the  control  of  the  "  Railroads'  War  Board."  This 
Board  was  organized  by  the  railways  ''  to  operate  all  the 
roads  of  the  country  as  one  system  for  the  purposes  of  na- 
tional defense."  It  was  the  aim  of  the  Board  to  secure  the 
maximum  of  efficiency  in  the  movement  of  coal,  food,  ma- 
terials, and  troops.  In  December,  1917,  the  United  States 
government  as  a  war  measure  took  control  of  the  great 
American  railway  network.  Such  control  was  originally 
authorized  to  continue  for  twenty-one  months  after  the 
treaty  of  peace  was  signed.  The  American  railways  are 
at  the  present  time  (1919)  owned  by  private  corporations 
and  are  operated  by  the  federal  government. 

Under  unified  and  governmental  administration  certain 
improvements  have  been  made  which  enable  more  work  to 


118  ELEMENTARY   ECONOMICS 

be  accomplished  with  less  effort,  —  the  true  aim  of  any  busi- 
ness organization  from  the  social  point  of  view.  Unneces- 
sary freight  and  passenger  offices  have  been  closed,  indirect 
routing  of  freight  cars  has  been  in  a  large  measure  eliminated, 
expenditures  for  advertising  and  legal  services  have  been 
reduced,  and  the  salary  roll  for  high  officials  cut.  Under 
one  management,  locomotives  and  rolling  stock  can  be 
standardized  with  a  saving  in  original  cost  and  in  the  ex- 
pense of  repairs.  Improvements  of  various  kinds  can  be 
made  on  the  theory  of  the  betterment  of  the  entire  national 
system  instead  of  a  single  line.  Under  unified  control,  the 
total  resources  and  equipment  of  the  railways  can  be  easily 
and  quickly  mobilized  to  complete  efficiently  and  expe- 
ditiously a  specific  task;  and  the  special  interests  of  a  par- 
ticular railway  will  no  longer  work  against  the  general 
railway  interest  or  the  general  interest  of  the  nation.  How- 
ever, practically  all  of  these  benefits  are  possible  under 
unified  private  management  as  well  as  under  governmental 
control. 

If  united  operation  be  desirable  as  a  war  measure,  if  it 
makes  for  efficiency  under  the  stress  of  war,  surely  unifica- 
tion will  also  make  for  efficiency  and  for  the  reduction  of 
waste  in  the  more  prosaic  times  of  peace.  It  is  quite  clear 
that,  if  the  operation  of  the  railways  is  again  to  be  placed 
in  the  hands  of  the  owners,  the  federal  statutes  should  be  so 
changed  as  to  allow  the  unification  of  the  American  rail- 
way system  under  the  strict  supervision  of  the  Interstate 
Commerce  Commission. 


CHAPTER  XIII 
MUNICIPAL   MONOPOLIES 

General  Principles.  Municipal  monopolies  are  natural 
monopolies  controlling  the  output  of  a  product  or  service 
of  great  importance  to  the  municipality.  The  businesses  of 
supplying  water,  gas,  electricity,  and  street  railway  service 
to  the  people  of  the  cities  are  the  most  important  municipal 
monopolies.  These  are  frequently  called  public  service 
corporations  because  the  business  of  such  monopolies  is  of 
especial  interest  to  the  people;  the  public  welfare  is  de- 
pendent upon  the  proper  and  continuous  functioning  of 
municipal  monopolies. 

A  private  municipal  monopoly  of  the  type  under  con- 
sideration, before  it  can  do  business,  must  obtain  a  franchise 
giving  to  the  corporation  the  right  to  use  the  city  streets  for 
the  location  of  its  tracks,  poles,  pipes,  or  wires.  In  the  early 
history  of  municipal  monopolies,  these  franchises  were 
usually  donated  to  the  company  proposing  to  operate; 
they  were  often  perpetual  and  did  not  bind  the  company 
in  any  effective  way  to  give  good  service  at  reasonable  rates. 
Fifty  or  seventy-five  years  ago  our  cities  were  much  smaller 
than  to-day,  and  the  business  of  public  service  corporations 
was  new  and  unstandardized.  The  investment  of  capital 
in  a  street  railway  plant  was  considered  to  be  and  in  reality 
was  a  speculative  venture.  To  grant  franchises  without 
recompense  and  without  definite  provisions  for  regulating 
the  company  was  not  considered  unwise ;  and  naturally  such 

119 


120  ELEMENTARY   ECONOMICS 

a  course  of  action  was  favored  by  the  promoters  of  public 
service  corporations.  The  unprecedented  growth  of  cities 
in. recent  decades  has  made  the  franchises  granted  very 
valuable  monopoly  privileges.  Under  public  management, 
the  advantages  of  this  special  privilege  would  go  to  the  com- 
munity in  the  form  of  profits  or  of  reduced  rates. 

The  early  history  of  municipal  monopolies  is  that  of  small 
corporations  aided  by  public  grants  and  without  regulation. 
The  consensus  of  opinion  was  that  competition  would  be  a 
sufficient  guarantee  of  fair  prices  and  equitable  treatment. 
But  the  business  of  these  companies  grew  larger  as  our  cities 
increased  in  population  and  wealth.  Franchises  became 
very  valuable  and  public  service  corporations  entered  politics 
in  order  to  obtain  special  favors  and  to  prevent  movements 
in  favor  of  regulation  from  coming  to  a  successful  issue.  An 
era  of  unparalleled  municipal  corruption  followed.  Ameri- 
can city  government  was  held  to  be  a  disgrace  to  our  civiliza- 
tion. ''  The  Shame  of  the  Cities  "  was  held  up  before  the 
American  people.  Finally  public  sentiment  was  aroused. 
The  people  of  our  cities  are  coming  to  accept  the  conclusion 
that  the  business  of  supplying  transportation,  water,  gas, 
electric  light,  and  telephone  service  are  public  service  in- 
dustries ;  that  they  are  essentially  monopolistic ;  and  that 
franchises  should  not  be  granted  in  perpetuity  or  without 
definite  provisions  for  regulation  and  control  by  the  city 
or  the  state  government.  And  along  with  this  new  con- 
ception of  the  public  service  corporation  is  coming  a  new  era 
in  municipal  government.  In  the  last  decade  or  two, 
municipal  administration  has  made  unprecedentedly  rapid 
strides  toward  efficiency  and  away  from  political  jobbery. 

The  reasoning  used  to  prove  that  a  gas  company  or  a 
street  railway  company  is  engaged  in  a  monopolistic  business, 


MUNICIPAL  MONOPOLIES  121 

is  quite  similar  to  that  used  in  the  case  of  a  steam  railway. 
It  is  economical  to  grant  a  franchise  to  only  one  gas  company 
in  a  city.  It  is  clearly  wasteful  and  uneconomical  to  allow 
two  lines  of  gas  mains  to  be  laid  in  the  same  street,  or  to  build 
two  gas  plants  where  one  larger  plant  would  produce  the 
gas  demanded  at  less  cost.  A  gas  company  must  have  a 
plant  and  gas  mains  whether  it  has  10,000  or  15,000  cus- 
tomers. Ordinarily,  the  cost  per  1000  cubic  feet  of  gas  is 
less  when  the  number  of  consumers  is  15,000  than  in  case 
the  number  is  reduced  by  the  competition  of  another  com- 
pany. As  in  the  case  of  the  railway,  competition  soon  brings 
about  combination  with  two  plants  doing  what  one  could 
perform  less  wastefully.  Competition  between  street  rail- 
way companies  in  a  given  city  soon  leads  to  combination. 
In  1890,  one  of  the  large  cities  of  the  Middle  West  boasted 
no  less  than  seven  street  railway  companies.  To-day  with 
a  population  approximately  three  times  as  numerous,  only 
one  company  is  doing  the  business. 

Water.  A  plant  furnishing  pure  water  under  pressure  to 
the  people  of  a  town  or  city  has  become  a  necessity  in  this 
country.  No  city  in  the  United  States  is  without  such  a 
plant ;  and  many  small  villages  have  built  a  water-pumping 
plant.  Comfort,  health,  cleanliness,  protection  from  fire, 
civic  beauty,  and  recreation,  all  require  an  adequate  and 
certain  supply  of  flowing  water.  The  business  of  furnishing 
a  water  supply  is  so  vital  to  the  welfare  of  the  community, 
and  the  engineering  problems  are  so  well  standardized  that 
a  large  percentage  of  American  waterworks  are  operated 
directly  by  the  cities.  In  1912,  only  eight  cities  with  a 
population  of  100,000  or  over  were  supplied  with  water 
pumped  by  privately  owned  plants.  The  consumer  ordina- 
rily pays  an  amount  equal  to  the  cost  of  the  water  supplied. 


122  ELEMENTARY   ECONOMICS 

Municipal  ownership  and  operation  of  waterworks  in  this 
country  is  a  success. 

If  the  municipality  furnishes  cold  water  for  a  variety  of 
purposes,  may  it  not  also  with  propriety  be  expected  to 
furnish  at  cost  hot  water  for  heating  our  houses?  Central 
heating  plants  are  much  more  economical  and  cleanly  than 
a  multitude  of  private  homes  each  operating  a  wasteful 
and  dirty  heating  plant.  The  use  of  water  power  trans- 
ported through  the  medium  of  electricity  for  heating  and 
lighting  may  also  become  quite  general  in  the  not  distant 
future.  Consequently,  the  water  power  of  the  nation  should 
be  utilized  directly  by  governmental  units  or  by  private 
companies  strictly  regulated  by  public  authority. 

Gas,  Electricity,  and  Transportation.  Gas  has  been  used 
as  an  illuminant  for  over  one  hundred  years.  With  a  few 
exceptions,  American  municipalities  rely  upon  private  com- 
panies to  furnish  gas  for  lighting,  heating,  and  cooking.  In 
1912,  Richmond,  Virginia,  was  the  only  city  of  at  least 
100,000  population  in  which  gas  was  furnished  by  a  mu- 
nicipal plant.  As  many  of  the  companies  were  organized  and 
obtained  their  franchises  before  the  recent  movement  for 
the  regulation  of  municipal  monopolies,  over-capitalization, 
poor  service,  and  exorbitant  rates  have  too  often  been  char- 
acteristic of  this  municipal  monopoly.  In  recent  years, 
however,  the  situation  has  improved. 

Electricity  first  came  into  use  for  lighting  purposes  in  the 
eighties.  For  illuminating  purposes,  it  is  gradually  displacing 
gas.  The  use  of  electricity  for  heating  and  for  cooking  may 
be  expected  to  increase  greatly  in  the  near  future.  Municipal 
ownership  of  electric  lighting  plants  is  much  more  common 
than  of  gas  plants ;  but  the  large  electric  plants  are  nearly 
all  operated  by  private  companies.    Large  companies  have 


MUNICIPAL  MONOPOLIES  123 

been  organized  to  supply  several  towns  and  cities.  For  ex- 
ample, the  little  city  in  which  the  writer  lives  is  supplied 
with  electricity  by  a  corporation  which  also  furnishes  elec- 
tricity to  several  other  cities  in  Southern  Michigan.  The 
current  is  carried  at  high  tension  from  a  source  of  power  many 
miles  away. 

Electricity  has  practically  displaced  other  forms  of  power 
for  street  railways;  but  in  recent  years  the  electric  street 
car  is  facing  the  competition  of  the  automobile.  With  the 
exception  of  three  cities  which  own  and  operate  street  rail- 
ways, the  American  systems  are  operated  by  private  com- 
panies. The  tendency,  as  in  other  municipal  monopolies, 
is  toward  more  strict  regulation  of  the  transportation  com- 
panies. In  the  past,  street  railway  companies  have  been 
guilty  of  over-capitalization  and  corrupt  methods.  The 
telephone  business  is  in  the  hands  of  private  corporations. 
In  European  cities,  municipal  ownership  and  operation  of 
municipal  monopolies  is  much  more  common  than  in  the 
United  States. 

Other  Municipal  Industries.  American  cities  have  not 
gone  far  in  developing  public  operation  of  industry.  The 
business  of  cleaning  the  streets  and,  in  many  cases,  that  of 
paving  the  streets  is  carried  on  directly  by  American  munic- 
ipalities. There  are  about  twenty  municipal  asphalt  paving 
plants.  A  large  percentage  of  our  cities  have  publicly  owned 
markets  from  which  truck  farmers  and  others  may  sell  direct 
to  consumers.  New  York  City  and  Boston  own  and  operate 
ferries.  The  city  of  New  Orleans  owns  a  large  percentage 
of  its  water-front. 

Several  American  cities  have  established  municipal  uni- 
versities. One  city  owns  a  telephone  plant ;  and  Cincinnati 
owns  a  steam  railway  over  thirty  miles  in  length.     Several 


124  ELEMENTARY   ECONOMICS 

American  cities  operate  ice  plants.  New  York  City  has 
six  large  markets  for  selling  produce  from  the  farms,  and 
meat.  Some  of  the  Australian  states  have  entered  into  a 
variety  of  businesses  in  competition  with  private  firms. 
West  Australia  has  for  years  owned  and  operated  brickyards, 
quarries,  saw-mills,  steamships,Jiotels,  agricultural  implement 
factories,  and  a  laundry.  In  1916,  under  the  pressure  of 
rising  prices,  retail  butcher  shops,  fish  markets,  and  bakeries, 
owned  and  operated  by  the  state,  were  opened  in  certain 
large  cities.  Queensland  also  began  in  1915  the  operation 
of  retail  butcher  shops.^ 

In  the  United  States,  a  further  increase  in  municipal 
ownership  and  operation  of  municipal  monopolies  may  be 
anticipated.  The  advocates  of  municipal  ownership  urge 
that  the  rates  charged  for  the  service  may  be  reduced  and 
the  quality  of  the  service  improved.  Service  rather  than 
profits  may  be  the  aim  of  public  operation.  The  profits  of 
monopoly,  it  is  asserted,  will  go  to  the  public  instead  of  into 
the  pockets  of  the  owners  of  a  monopoly  privilege.  Public 
service  corporations  would  no  longer  exist  to  corrupt  city 
officials.  It  is  also  urged  that  better  wages  will  be  paid 
under  municipal  than  under  private  management  and  that 
working  conditions  will  be  improved. 

On  the  other  hand,  the  opponents  of  municipal  ownership 
and  operation  urge  that  the  efficiency  of  the  plants  will  be 
reduced  under  public  management,  and  that  certain  in- 
centives which  keep  the  managers  of  private  enterprises  alert 
and  progressive  are  lacking  under  municipal  control.  It  is 
also  asserted  that  the  employees  in  municipal  plants  will  use 
their  political  influence  to  obtain  higher  wages,  a  shorter 
working  day,  and  other  concessions. 

1  Notz,  The  Survey,  September  22,  1917. 


MUNICIPAL   MONOPOLIES  125 


TOPICS   FOR   DISCUSSION 

1.  What  municipal  monopolies  are  carried  on  in  your  town  or 
city? 

2.  Should  other  businesses  be  carried  on  as  municipal  monop- 
olies?    Why? 

3.  Should  water  be  furnished  free  to  residents  of  your  city? 

4.  Should  a  municipal  monopoly  "make  money"? 


CHAPTER  XIV 
THE  LABOR  FORCE 

Labor  in  Modem  Industry.  In  colonial  days,  the  pro- 
ducer consumed  the  major  portion  of  the  supplies  he  pro- 
duced. Industry  was  organized  on  a  very  simple  scale; 
the  tool  was  the  predominant  type  of  instrument  used. 
Only  a  comparatively  small  percentage  of  the  labor  force 
worked  for  wages  —  were  wage  earners.  The  pioneer  farmer 
was  self-employed ;  he  was  not  a  wage  earner.  Two  other 
forms  of  labor  were  utilized  in  colonial  times,  indentured 
servants  and  slaves.  Hard  labor,  the  sweat  of  the  brow, 
played  a  large  part  in  early  American  industry.  Capital 
was  of  much  less  relative  importance  than  at  the  present 
time.     Industry  was  still  in  the  small-tool  stage  of  evolution. 

Since  the  Civil  War,  American  industry  has  become 
capitalistic.  The  machine  has  largely  displaced  the  tool. 
The  self-employed  worker  has  almost  entirely  disappeared 
except  in  farming  and  in  certain  forms  of  professional  serv- 
ice. Capital  is  dominant;  the  owners  of  capital  hire 
wageworkers  and  direct  their  efforts.  The  wageworker 
obeys  orders;  he  no  longer  owns  the  tools  or  the  machine 
with  which  he  works,  the  raw  material,  or  the  finished  product. 
He  labors  for  a  definite  contractual  wage.  Goods  are  almost 
universally  produced  for  the  market,  not  for  home  con- 
sumption.    The  attention  is  centered  upon  prices. 

The  wage-earning  labor  force  is  now  a  very  considerable 
percentage  of  the  total  population.  In  the  United  States, 
there  are  at  the  present  time  30,000,000  or  more  gainfully 

126 


THE   LABOR   FORCE  127 

employed  workers.  Of  this  number  approximately  one 
fourth  are  female,  —  and  the  number  of  women  workers  is 
rapidly  increasing.  A  very  large  percentage  of  our  wage 
earners  live  in  cities  and  are  foreign-born  or  the  children 
of  foreign-born  parents.  The  rough,  hard,  routine  manual 
labor  is  the  burden  of  the  recent  and  often  despised  im- 
migrant. The  unskilled  workers  in  our  factories,  a  large 
percentage  of  the  mine  workers,  the  section  hands  on  our 
railways,  and  the  workers  in  the  beet  and  onion  fields  are 
recent  immigrants.  A  large  fraction  of  the  farm  laborers 
and  also  of  the  drifting  and  irregular  workers  of  the  West 
are,  however,  not  composed  of  recent  immigrants.  Big 
national  problems  are  connected  with  the  Americanization 
of  this  great  recent  immigration  and  with  raising  its  stand- 
ard of  efficiency.  The  managerial  positions,  professional 
service,  clerical  work  —  the  salaried  positions  —  and  the 
skilled  trades  are  very  largely  in  the  hands  of  the  children 
of  the  earlier  immigrants  from  Northwestern  Europe. 

Immigration.  Until  1880,  nearly  all  of  the  immigration 
to  this  country  came  from  Northwestern  Europe.  The 
English-speaking  people  were  predominant  in  the  first 
decades  of  the  new  nation.  In  the  forties,  the  Irish  driven 
by  the  potato  famine  came  in  large  numbers  to  our  shores. 
The  revolutionary  disturbances  of  1848  also  led  many  Ger- 
mans to  cross  the  Atlantic.  In  the  decade,  1851-1860, 
Great  Britain,  Ireland,  and  Germany  furnished  nearly 
nine-tenths  of  the  total  immigration.  A  rural  environment 
and  cheap  land  attracted  the  attention  of  many  sturdy  and 
independent  men.  The  immigrant  of  the  pre-Civil  War 
period  had  to  undertake  a  long  and  tedious  journey  and 
after  his  arrival  enter  upon  the  hardships  and  the  isolation 
of  pioneer  life.     Only  the  sturdy  and  independent  dared 


128  ELEMENTARY   ECONOMICS 

undertake  the  long  and  difficult  journey  unless  the  con- 
ditions in  the  home  land  were  very  repulsive. 

About  1880,  the  situation  changed.  The  frontier  and  the 
free  homestead  were  becoming  matters  only  of  history. 
Manufacture,  mining,  and  the  railways  were  growing.  Big 
business  was  appearing  above  the  horizon  of  the  industrial 
world.  The  ever-growing  factories  utilizing  more  and  more 
machinery  were  searching  for  docile  routine  workers;  and 
improved  transportation  facilities  made  the  journey  to 
America  comparatively  safe  and  easy.  In  1909,  Great 
Britain,  Ireland,  and  Germany  sent  only  about  one-eighth 
of  our  total  immigration;  but  Austria-Hungary,  Italy, 
Russia,  and  Poland  contributed  five-eighths  of  the  total. 
While  the  character  of  the  stream  of  immigration  was  chang- 
ing, its  volume  was  increasing  in  an  irregular  and  jerky 
fashion.  Years  of  prosperity  turned  more  and  more  faces 
to  the  New  World;  an  epoch  of  hard  times  reduced  the 
volume.  Immigration  is  a  matter  of  pushes  and  pulls. 
Good  times  and  liberal  treatment  attract  many  newcomers 
to  a  country  of  immigration;  but  hard  times  and  harsh 
treatment  in  the  home  lands  also  send  many  forth  in  search 
of  better  things.  In  1837,  only  80,000  immigrants  were 
admitted;  in  1907,  the  high-water  mark  of  1,285,000  was 
attained,  —  a  total  greater  than  the  population  of  Cleve- 
land in  1917.  This  total  was  equal  to  one  third  of  the 
population  of  the  United  States  when  the  first  Census  was 
taken  in  1790.  For  1909,  the  figures  are  751,000;  but,  in 
1914,  the  stream  came  near  to  the  mark  of  1907  with  a  total 
of  1,218,000.1  The  opening  of  the  Great  War  immediately 
checked  immigration.  In  1915,  the  number  reported  was 
326,700;  in  1916,  298,826;  and,  in  1917,  295,403.     Every 

1  The  figures  are  for  the  fiscal  year  ending  June  30. 


THE   LABOR   FORCE  129 

year  a  considerable  number  of  aliens  return  to  their  home 
country.  On  the  average,  the  number  returning  has  been 
equal  to  one-third  of  the  incoming  horde.  The  net  immi- 
gration has  been,  therefore,  about  two-thirds  of  the  gross 
figures  given  above.  In  1919,  the  percentage  returning  is 
much  larger. 

The  great  expansion  of  industry  in  recent  years  and  the 
rising  tide  of  immigration  are  related  phenomena.  Without 
the  labor  supply  furnished  from  outside  the  country,  in- 
dustrial progress  would  have  been  slower  and  the  growth 
of  cities  less  rapid.  On  the  other  hand,  except  for  the  great 
progress  toward  large-scale  business  and  the  increasing  use 
of  machinery,  the  immigrant  from  Southern  Europe  would 
have  found  no  job  awaiting  him  as  soon  as  he  planted  his 
feet  on  the  land  of  promise.  The  marked  reduction  in  the 
number  of  immigrants  following  the  opening  of  the  war  in 
1914  tended  to  reduce  the  supply  of  wageworkers.  As  a 
consequence  in  1916,  Negroes  began  to  come  North  in  con- 
siderable numbers.  The  Negroes  obtained  jobs  in  mills 
and  factories.  By  the  middle  of  the  year  1917,  several 
hundred  thousands  of  colored  folks  had  left  the  South. 

The  immigration  of  recent  decades  from  Southern  Europe 
has  forced  upon  the  people  of  the  United  States  certain 
very  difficult  economic  and  social  problems.  A  large  per- 
centage of  the  newcomers  are  ignorant  and  unskilled;  they 
are  not  accustomed  to  the  form  of  government  with  which 
we  are  familiar.  They  have  taken  low-paid  jobs  and  have 
been  obliged  to  live  in  the  crowded  and  insanitary  portions 
of  our  cities  and  factory  towns.  The  death  rate  among 
the  recent  immigrants  and  their  children  is  high.  The 
American  people  have  paid  little  attention  to  the  immigrant. 
We  have  expected  him  to  work  hard  for  low  wages,  and  to  be 


130  ELEMENTARY   ECONOMICS 

docile  and  uncomplaining.  It  has  been  complaisantly  urged 
that  America  is  a  "  melting  pot "  for  the  people  of  the 
Western  World ;  but  the  pot  has  not  been  carefully  watched. 
When  face  to  face  with  a  great  world  war,  Americans  began 
quickly  to  realize  that  national  security  demanded  that 
more  attention  be  paid  to  the  immigrant,  that  he  and  other 
unskilled  workers  be  accorded  better  treatment  than  that 
which  has  been  too  frequently  given,  and  that  the  Ameri- 
canization of  the  immigrant  is  of  paramount  importance. 

Restriction  of  Immigration.  Although  Americans  have 
repeatedly  boasted  that  the  United  States  is  an  asylum  for 
the  oppressed  and  forlorn  of  all  lands,  opposition  to  immi- 
gration is  not  of  recent  origin.  Many  of  the  founders  of 
the  nation  were  opposed  to  immigration.  They  feared  that 
the  newly  established  republican  form  of  government  might 
be  undermined  and  destroyed,  provided  too  many  came  here 
from  monarchical  Europe.  In  the  forties  and  fifties  of  last 
century,  the  coming  of  the  Irish  Catholics  and  of  many 
Germans  who  did  not  seek  to  be  naturalized,  led  to  the 
formation  of  a  political  party  which  proposed  to  exclude 
Catholics  and  immigrants  from  political  offices.  But, 
after  the  Civil  War  opened,  the  opposition  to  immigration 
died  away  temporarily. 

The  first  general  immigration  law  was  passed  in  1882. 
Since  that  date  several  acts  in  regard  to  immigration  have 
been  placed  upon  our  statute  books.  Briefly  stated,  our 
present  laws  exclude  illiterates,  paupers,  defectives,  diseased 
persons,  immoral  persons,  anarchists,  ■  polygamists,  and 
laborers  under  contract  to  work  for  some  American  em- 
ployer. Chinese  laborers  are  excluded  by  special  act;  and 
through  an  agreement  with  the  Japanese  government 
laborers  from  that  coimtry  are  not  allowed  to  come  to  the 


THE    LABOR   FORCE  131 

United  States.  Careful  inspection  of  immigrants  is  pro- 
vided for  at  the  ports  of  entry  by  the  federal  government. 
The  opinion  is  held  by  many  Americans  that  this  or  any 
other  prosperous  and  progressive  country  having  a  low 
birth  rate  may  properly  protect  itself  from  the  influx  of 
low-standard-of-living  workers  from  a  country  of  high 
birth  rate  and  dense  population.  It  is  urged  that  unre- 
stricted migration  would  in  such  a  case  tend  to  spread 
poverty  world  wide. 

Routine  Work.  Modern  industry  imposes  upon  the 
workers  speed  and  monotony.  Skilled  occupations  have 
been  pulled  apart  and  subdivided  into  a  considerable  num- 
ber of  unskilled  or  semi-skilled  forms  of  labor.  The  worker 
is  speeded  up  and  repeats  in  a  monotonous  way  some  simple 
operation,  hour  after  hour  and  day  after  day.  Simple 
routine  work  continued  for  a  long  working  day  finally  be- 
comes deadening  and  stupefying.  The  worker  becomes  an 
unthinking  machine;  and  after  his  day's  work  is  done  he 
is  in  no  position  to  consider  the  obligations  of  good  citizen- 
ship. A  long  working  day  coupled  with  monotonous  un- 
skilled work  complicates  greatly  our  labor  and  social  prob- 
lems.    The  eight-hour  day  makes  for  good  citizenship. 

The  Migratory  Worker.  A  dangerously  large  percentage 
of  the  American  labor  force  is  composed  of  migratory  and 
homeless  workers.  The  conditions  in  many  of  our  im- 
portant industries  make  for  irregularity  of  work  and  for 
the  degeneracy  of  the  workers.  The  section  gangs  on  our 
railways  and  construction  workers  of  various  kinds  include 
many  homeless,  drifting  workers.  In  the  harvest  fields  and 
on  the  fruit  farms  of  the  West,  in  the  beet  and  onion  fields, 
and  in  the  logging  camps  are  found  migratory  and  homeless 
workers.     It  was  estimated  in  1915  that  in  California  alone 


132  ELEMENTARY   ECONOMICS 

there  were  nearly  200,000  casual  workers.  This  Pacific 
Coast  state  offers  jobs  to  thousands  in  the  summer  who 
must  drift  back  to  the  cities  and  to  idleness  and  debauchery 
in  the  winter.  These  casual  workers  are  almost  without 
exception  harshly  treated  by  their  employers  and  by  the 
public  authorities.  The  radical  and  revolutionary  labor 
organization  called  the  Industrial  Workers  of  the  World  is 
composed  almost  entirely  of  workers  from  the  casual  labor 
group.  One  of  the  keenest  observers  of  labor  conditions 
in  this  country  warns  the  American  people  that  ''  we  shall 
hear  more  and  more  of  the  unskilled,  underpaid,  disorganized 
seasonal  workers.  They  will  themselves  see  to  it  that  we 
hear."  The  irregular  workers,  discontented  and  ill-treated, 
are  a  menace  to  organized  society;  but  stern  repression  of 
this  discontented  group  will  not  solve  the  problem.  This 
great  group  of  drifting  workers  has  lost  the  normal  incen- 
tives in  life  and  the  point  of  view  which  places  emphasis 
upon  workmanlike  qualities.  These  unblessed  rootless 
workers  are  hostile  to  organized  society  and  to  the  ideals 
which  the  middle  class  and  the  more  conservative  group  of 
American  workingmen  blessed  with  home  ties  and  a  stake 
in  life,  hold  dear. 


CHAPTER  XV 
LABOR   ORGANIZATIONS 

Why  Is  Labor  Organized?  The  modern  labor  organiza- 
tion is  a  product  of  the  cleavage  between  employee  and 
employer.  As  long  as  industry  was  small-scale,  as  long  as 
the  employer  usually  worked  with  his  men,  and  every  wage- 
worker  hoped  to  become  a  small  business  man,  to  work  for 
himself,  the  only  labor  organizations  were  local  and  ephem- 
eral labor  societies  formed  to  prevent  a  threatened  encroach- 
ment upon  their  standard  of  living  or  to  combat  some  other 
danger.  In  recent  decades,  industries  have  become  large- 
scale;  the  employer  no  longer  comes  into  personal  contact 
with  his  employees,  and  the  wageworker  no  longer  hopes 
to  rise  out  of  his  group  into  the  class  of  independent  business 
men.  Workingmen,  as  a  consequence,  have  become  pri- 
marily interested  in  their  prospects  as  wageworkers,  and 
are  no  longer  much  concerned  about  the  chances  of  be- 
coming other  than  wageworkers.  The  labor  organizations 
of  to-day  are  permanent  and  firmly  united  bodies. 

A  labor  organization  has  been  defined  as  an  ''  association 
of  wage  earners  for  the  purpose  of  maintaining  or  improving 
the  conditions  of  their  employment."  To  maintain  or  to 
improve  working  conditions  organization  is  essential,  de- 
clares the  unionist  of  to-day.  Through  union  action,  it  is 
asserted,  wages  have  been  raised,  the  length  of  the  working 
day  shortened,  and  other  advantages  gained.  The  union  is  a 
l?etter  bargainer  than  the  individual   wage  earner.       The 

133 


134  ELEMENTARY   ECONOMICS 

unorganized  wageworker  cannot  hope  to  drive  an  equitable 
bargain  with  a  large  aggregation  of  capital.  In  short,  in 
unity  there  is  strength.  Capital  has  found  the  union 
called  the  corporation  advantageous;  labor  likewise  is 
banding  together  for  its  betterment.  The  labor  organi- 
zation is  the  counterpart  of  the  corporation. 

Relation  of  Employer  to  Employee.  The  point  of  view 
of  the  employer  is  quite  different  from  that  of  the  employee. 
The  employer  is  primarily  interested  in  the  financial  success 
of  his  business  and  only  secondarily  in  the  welfare  and 
happiness  of  the  workers  whom  he  hires.  To  many  em- 
ployers of  to-day,  productive  activity  —  work  —  on  the 
part  of  the  great  mass  of  people  is  the  only  excuse  for  the 
existence  of  the  latter.  Too  often  are  the  wageworkers 
of  the  nation  treated  as  animated  machines. 

On  the  other  hand,  the  workers  in  this  era  of  machinery 
and  of  great  productivity  are  insistently  demanding  more 
and  more  of  the  comforts  of  life  and  an  increasing  amount 
of  leisure  time.  Labor  organizations  have  come  into  being 
to  aid  in  giving  the  workers  higher  wages,  a  shorter  working 
day,  and  better  working  and  living  conditions.  The  labor 
organization  is  insisting  upon  "  respect  for  mere  men," 
and  upon  better  treatment  for  the  great  class  of  toilfers  in 
mill,  mine,  store,  and  elsewhere. 

Not  only  are  the  economic  interests  of  the  employer  and 
the  employed  very  different,  but  their  work  and  experience 
are  dissimilar.  One  is  engaged  in  directing  a  business,  in 
buying  and  selling,  in  markets  and  prices,  in  contracts 
and  property  rights ;  the  other  in  doing  a  routine  or  a  skilled 
form  of  manual  work  involving  little  or  no  business  experi- 
ence. The  two  rarely  or  never  meet  outside  the  factory  in 
social  life.    As  a  consequence  of  this  lack  of  contact  with 


LABOR   ORGANIZATIONS  135 

each  other  during  working  or  leisure  hours,  each  is  incHned 
to  under-emphasize  the  abihty,  the  importance  of  the 
function,  and  the  virtues  of  the  other.  Out  of  this  un- 
fortunate situation  easily  develop  misunderstanding,  an- 
tagonism, and  bitterness  in  the  industrial  world. 

The  Knights  of  Labor.  A  few  isolated  labor  organizations 
may  be  found  in  the  United  States  before  1825 ;  and  from 
1825  to  the  close  of  the  Civil  War  many  organizations  of 
workingmen  were  formed.  Some  of  these  were  of  con- 
siderable political  and  industrial  importance.  But  the 
first  great  American  organization  of  laboring  people  was 
named  the  Knights  of  Labor.  It  was  organized  in  1869  as 
a  secret  society.  The  Knights  of  Labor  was  not  a  trade 
union;  it  was  a  mass  organization  of  all  kinds  of  workers. 
The  Printers'  or  the  Typographical  Union,  for  example,  is  a 
trade  union;  but  the  Knights  of  Labor  admitted  printers, 
carpenters,  tailors,  unskilled  workers,  —  all  sorts  of  wage- 
workers.  The  organization  grew  slowly  until  the  early 
eighties ;  then  it  suddenly  increased  greatly  in  membership. 
In  1886,  it  is  said  to  have  had  600,000  members.  But  it 
was  very  difficult  to  hold  this  big  mixed  group  of  workers 
together.  The  period  of  decline  soon  followed;  and  in  its 
stead  appeared  the  American  Federation  of  Labor.  The 
Knights  of  Labor  is  still  in  existence  as  a  very  weak  and 
inconsequential  organization. 

The  American  Federation  of  Labor.  The  American 
Federation  of  Labor  was  organized  in  1881.  The  under- 
lying principles  of  this  labor  organization  are  quite  different 
from  those  of  the  Knights  of  Labor.  The  Federation  is, 
as  its  name  indicates,  a  federation  of  unions.  An  individual 
wageworker  does  not  directly  belong  to  the  American 
Federation  of  Labor.     If  he  is  a  union  carpenter,  he  belongs 


136  ELEMENTARY   ECONOMICS 

to  a  local  union  of  carpenters  in  his  town  which  in  turn  is  a 
part  of  the  national  union  called  the  United  Brotherhood  of 
Carpenters  and  Joiners  of  America.  This  national  union  is 
affiliated  with  approximately  110  other  national  unions  such 
as  the  United  Mine  Workers  and  the  International  Associa- 
tion of  Machinists,  in  the  American  Federation  of  Labor. 
City  federations,  state  federations  of  labor,  and  trade  de- 
partments such  as  the  Mining  Department,  are  also  organized 
within  the  American  Federation ;  but  the  one  hundred  and 
eleven  (in  1918)  national  unions  control  the  policy  of  the 
American  Federation  of  Labor. 

Over  three  millions  of  wage  workers  belong  (1919)  to 
the  organizations  affiliated  with  the  American  Federation. 
An  annual  convention  is  held  each  year  to  which  dele- 
gates are  sent  from  the  affiliated  organizations  in  propor- 
tion to  membership.  The  Federation  unites  the  major 
portion  of  union  men  in  the  United  States  into  one  body. 
It  has  little  direct  authority  over  its  affiliated  members; 
but  its  indirect  influence  is  of  considerable  importance. 
It  exerts  much  political  influence  in  securing  the  passage 
of  legislation  favorable  to  the  wageworkers  of  the 
nation.  According  to  the  constitution  of  the  Federation, 
its  chief  purposes  are  to  unite  the  national  unions  together 
for  mutual  assistance,  to  encourage  the  sale  of  union 
label  goods,  to  secure  labor  legislation,  to  influence 
public  opinion  in  favor  of  organized  labor,  to  aid  and  en- 
courage the  labor  press,  and  to  aid  in  forming  local  unions. 
Samuel  Gompers  is  the  President  of  the  Federation.  Only 
a  few  important  labor  organizations,  including  the  radical 
Industrial  Workers  of  the  World,  now  remain  outside  the 
Federation.  The  total  membership  in  all  unions  in  the 
United  States  is  nearly  four  million. 


LABOR   ORGANIZATIONS  137 

The  Structure  of  a  Labor  Organization.  There  are  two 
important  varieties  of  labor  organizations  at  the  present 
time,  trade  or  craft  and  industrial  unions.  A  trade  union 
is  composed  of  wageworkers  of  one  trade  only,  such  as,  for 
example,  the  machinists.  The  union  machinists  in  a  given 
town  working  in  different  shops,  all  belong  to  one  local,  a 
part  of  the  International  Association  of  Machinists.  The 
industrial  union  is  not  limited  by  occupational  lines ;  it  aims 
to  unite  all  the  wageworkers  in  a  shop  or  mine,  irrespective 
of  the  sort  of  a  job  they  may  hold,  into  one  coherent  organiza- 
tion. The  United  Mine  Workers  of  America  is  an  industrial 
union;  into  this  union  are  gathered  all  the  workers  in  and 
around  the  mines,  -^  miners,  helpers,  engineers,  carpenters, 
teamsters,  etc.  The  United  Mine  Workers  is  the  largest 
union  affiliated  in  the  American  Federation  of  Labor;  but 
the  great  majority  of  the  national  unions  in  the  American 
Federation  are  trade  unions.  Modern  industry  is  tending 
to  destroy  the  sharpness  of  trade  demarcations;  more  and 
more  unions  of  the  industrial  type  may  be  anticipated  in 
the  future. 

The  fundamental  unit  in  labor  organizations  is  the  local. 
In  a  trade  union,  as  has  been  indicated,  a  local  is  composed 
of  the  workers  in  a  given  trade,  living  in  one  locality ;  these 
locals  in  turn  belong  to  a  national,  sometimes  called  an 
international,  union.  In  an  industrial  union,  the  local 
contains  the  workers  in  a  given  shop  or  factory.  The 
national  union  is  a  federation  of  locals.  The  power  and 
administrative  methods  of  national  unions  vary  greatly. 
In  certain  organizations,  of  which  the  Typographical  Union 
is  one,  the  national  union  —  the  central  body  —  is  strong 
and  controls  quite  rigidly  the  locals.  In  others,  such  as 
the  Barbers'  Union,  the  central  organization  is  weak.    The 


138  ELEMENTARY   ECONOMICS 

tendency  in  recent  years  is  almost  universally  to  strengthen 
the  power  of  the  national  organization  over  the  locals. 

Like  the  form  of  government  of  a  nation,  the  structure  and 
methods  of  a  labor  organization  have  been  adopted  in  re- 
sponse to  the  peculiar  circumstances  surrounding  that  group 
of  workers.-  No  two  classes  of  workers  face  exactly  the  same 
obstacles  or  difficulties.  Some  workers  are  skilled  and  not 
easily  replaced;  others  are  unskilled  and  always  fear  the 
competition  of  the  green  hand.  In  some  cases,  machinery 
modifies  the  conditions  in  the  trade,  as  in  the  shoemaking 
industry;  in  others  it  does  not  greatly  affect  the  situation, 
as  in  the  case  of  the  barbers.  Again,  employers  are  very 
hostile,  as  has  been  the  case  in  the  iron  and  steel  industry ; 
or  generally  friendly,  as  in  the  stove  industry.  These  and 
a  multitude  of  other  circumstances  tend  to  give  a  peculiar 
form  of  organization  to  each  union.  As  no  two  nations 
have  exactly  the  same  form  of  government,  so  no  two  labor 
organizations  are  exactly  alike  in  form  and  government. 

The  average  unionist,  like  the  average  man,  is  interested 
in  the  things  which  immediately  and  directly  concern  him 
and  his  family.  He  desires  immediate  results  which  mean 
higher  wages,  a  shorter  working  day,  and  better  living  con- 
ditions. The  unionist  like  many  other  men  may  have  high 
ideals ;  but  he  is  especially  prone  to  be  moved  by  ''  bread 
and  butter  "  logic.  It  must  be  admitted  that  union  policies 
are  the  output  of  selfish  and  short-sighted  groups ;  and  it  is 
true  that  the  labor  leader,  like  the  successful  politician,  is 
one  who  can  get  results  which  are  tangible  in  the  near  future. 
In  short,  the  member  of  a  labor  organization  is  possessed 
of  the  faults  and  frailties  of  the  ordinary  person  in  your 
community.  We  should  be  more  patient  with  organized 
labor ;  we  should  diligently  seek  for  the  causes  of  the  peculiar 


LABOR   ORGANIZATIONS  139 

methods  and  policies  to  which  organized  labor  is  committed. 
Invectives  and  unlawful  persecution  only  aggravate  the 
difficulty.  Organized  labor  is  here  and  here  to  stay.  In- 
stead of  attempting  to  smash  it,  we  should  try  to  under- 
stand it. 

The  Industrial  Workers  of  the  World.  Unlike  the  labor 
organizations  affiliated  in  the  American  Federation  of 
Labor,  this  union  is  a  frankly  revolutionary  body.  The 
Industrial  Workers  do  not  accept  the  present  industrial 
order;  they  wish  to  overthrow  it.  The  employer  is  not  to 
be  bargained  with  except  in  a  case  of  necessity ;  he  is  to  be 
eliminated.  Frequent  strikes,  the  use  of  violence,  injury 
to  machinery,  or  concerted  inefficiency  —  sabotage  —  are 
some  of  the  weapons  which  the  radical  Industrial  Workers 
of  the  World  propose  to  use  against  the  owners  of  capital. 
This  organization  is  an  industrial  union ;  trade  or  craft  lines 
are  given  no  consideration  in  the  formation  of  the  locals. 
In  a  given  factory,  all  wageworkers  are  to  be  grouped  to- 
gether in  one  local.  The  membership  is  small  and  fluctuat- 
ing; it  consists  chiefly  of  the  unskilled  and  migratory  or 
homeless  workers.  The  strength  of  the  Industrial  Workers 
lies  in  its  passionate  appeal  to  the  discontented  and  unsuc- 
cessful rather  than  in  numbers  or  in  a  full  treasury.  Its 
stirring  slogans  point  to  class  hatred  and  the  solidarity  of 
the  wage-earning  class.  Soon  after  the  United  States  was 
forced  into  the  war  in  1917,  the  Industrial  Workers  of  the 
World  attempted  to  embarrass  the  government  by  declaring 
strikes  in  certain  important  industries.  This  action  was 
quite  in  harmony  with  the  philosophy  of  the  organization 
in  regard  to  government  and  patriotism. 

Employers'  Associations.  Employers,  as  well  as  em- 
ployees, form  unions.    The  corporation  is  from  one  point  of 


140  ELEMENTARY  ECONOMICS 

view  a  union  of  stockholders.  Employers  also  organize  fed- 
erations or  unions  of  a  different  nature.  One  kind  of  union 
is  called  an  employers'  association.  These  associations  are, 
like  unions  of  wageworkers,  both  local  and  national,  — 
city  and  national  employers'  associations.  Employers  unite 
to  advance  their  own  interests  in  various  ways,  and  particu- 
larly to  resist  the  aggressions  of  labor  organizations.  On 
occasion,  they  do  not  hesitate  to  use  weapons  similar  to  those 
used  by  the  much  criticized  labor  men.  The  lockout  is 
used  instead  of  the  strike ;  the  blacklist  is  the  converse  of 
the  boycott;  and  spies  and  armed  guards  serve  ends  not 
dissimilar  to  those  for  which  the  union  uses  pickets. 

The  National  Association  of  Manufacturers  is  a  nation- 
wide organization  of  employers  corresponding  to  the  Ameri- 
can Federation  of  Labor.  City  employers'  associations,  of 
which  there  are  many,  are  similar  to  the  city  central  labor 
unions.  The  National  Founders'  Association,  which  is 
composed  of  foundrymen,  is  the  counterpart  of  the  Inter- 
national Holders'  Union.  These  organizations  are  bitterly 
anti-union.  They  wish  to  crush  unionism ;  at  least,  they 
wish  to  crush  the  kind  of  unionism  which  is  strong  and  ''  has 
teeth."  Anti-union  employers'  associations  assert  that 
their  members  propose  to  "  run  their  own  business."  They 
object  to  bargaining  with  representatives  of  a  labor  organiza- 
tion ;  they  stand  for  the  "  open  "  or  non-union  shop.  The 
attitude  of  these  associations  has  increased  the  danger  of  a 
bitter  class  struggle  between  labor  and  capital. 

Other  associations  of  employers  are  also  in  existence  that 
bargain  with  organized  labor,  or  that  are  not  anti-union. 
It  is  the  plan  of  this  type  of  associations  to  bargain  collect- 
ively with  the  union  of  their  employees,  and  to  check  the 
excesses  of  unionism.    The  Stove  Founders'  Defense  Asso- 


LABOR   ORGANIZATIONS  141 

ciation  of  stove  manufacturers  is  of  this  type.  For  years, 
the  stove  manufacturers  have  bargained  with  the  Inter- 
national Holders'  Union;  and  strikes  in  that  important 
industry  have  been  avoided. 

TOPICS  FOR   DISCUSSION 

1.  What  labor  organizations  have  members  in  your  town  or 
city? 

2.  Are  the  business  men  organized  ? 

3.  What  is  the  attitude  of  your  friends  and  relatives  toward 
labor  organizations? 

4.  What  is  the  attitude  of  the  largest  employers  of  labor  in  your 
city? 


CHAPTER  XVI 
LABOR  LEGISLATION 

The  Labor  Contract.  The  condition  of  wageworkers 
may  also  be  improved  by  legislation.  Unorganized  workers, 
especially  women  and  children,  may  be  benefited  by  the 
passage  of  labor  laws ;  but  organized  labor  is,  in  many  cases, 
sufficiently  strong  to  obtain  the  same  ends  without  the 
interposition  of  legislative  bodies.  Labor  legislation  is  a 
form  of  legislation  which  is  passed  primarily  in  order  to 
improve  the  working  conditions  of  wage  earners;  the 
ultimate  aim  is  to  raise  the  national  efficiency.  When  a 
wage  earner  is  hired  a  more  or  less  formal  contract  is  entered 
into.  This  labor  contract  —  an  agreement  made  by  one 
person  to  perform  for  compensation  certain  services  for 
another  —  is  the  result  of  a  bargain.  Labor  legislation 
constitutes  an  interference  with  the  right  freely  to  make  a 
labor  contract.  Law-making  bodies  recognize  that  as  a 
rule  the  employer  is  in  a  more  favorable  position  for  bar- 
gaining in  regard  to  the  terms  of  the  labor  contract  than 
are  his  employees,  especially  in  case  the  latter  are  unor- 
ganized workers.  Bargaining  between  employers  and  un- 
organized employees  is  known  to  be  one-sided.  From  this 
point  of  view,  labor  legislation  is  an  attempt  to  eliminate 
some  of  the  conditions  which  make  for  inequality  in  bar- 
gaining. It  is  an  attempt  to  remedy  the  evils  of  individual 
bargaining.  Labor  laws  fix  the  limits  beyond  which  no 
wage  bargain  can  be  made. 

Attitude  of  the  Courts.  In  the  United  States,  labor  laws 
and  other  forms  of  legislation  passed  by  our  various  legisla- 

142 


LABOR   LEGISLATION  143 

tive  bodies  may  be  declared  unconstitutional  by  the  courts. 
When  a  law  is  declared  unconstitutional,  it  becomes  null  and 
void  and  is  no  longer  enforced.  The  Constitution  of  the 
United  States  was  formulated  and  ratified  before  the  days 
of  big  business,  of  railways,  and  of  airships.  According 
to  the  prevailing  political  theory  of  that  period,  the  govern- 
ment ought  not  to  interfere  in  ordinary  business  affairs; 
and  this  theory  found  its  place  in  sections  of  the  Constitu- 
tion. The  wage  bargain  was  a  matter  to  be  settled  by 
the  wageworker  and  his  employer  without  outside  or  official 
interference.  This  theory  of  non-interference  seems  to 
have  been  fairly  equitable  in  the  days  of  small  business  and 
of  the  pioneer ;  but  in  recent  years  many  of  the  ablest  men 
and  women  in  the  land  have  come  to  believe  that  govern- 
mental interference  in  the  business  world  is  often  desirable. 
Early  labor  laws  were  in  great  danger  of  being  declared 
unconstitutional  by  the  courts.  Indeed,  to-day,  a  literal 
or  strict  interpretation  of  the  Constitution  would  cause 
many  labor  laws  to  be  declared  null  and  void. 

But  the  Constitution  was  ordained  among  other  things 
"  to  promote  the  general  welfare."  Acting  under  the  general 
welfare  clause  of  the  Constitution  and  using  the  somewhat 
indefinite  and  elastic  "  police  power  of  the  state,"  American 
courts  in  recent  years  have  declared  many  labor  laws  con- 
stitutional which  a  few  decades  ago,  under  less  complex 
industrial  conditions,  would  have  met  with  the  disapproval 
of  the  courts.^  These  laws  are  held  to  make  for  equity  in 
bargaining  between  employer  and  employee,  and  to  improve 
the  health,  efficiency,  and  welfare  of  the  working  men  and 
women  of  the  nation.     The  police  power  of  the  state  may 

1  For  a  more  detailed  discussion  of  this  important  matter,  see  Carlton, 
History  and  Problems  of  Organized  Labor,  pp.  263-274. 


144  ELEMENTARY   ECONOMICS 

be  exercised  to  restrain  the  individual  in  order  to  promote 
the  social  welfare.  Sanitary  and  health  regulations  are 
enforced  by  virtue  of  the  police  power.  In  recent  years, 
American  courts  are  ruling  that  certain  forms  of  labor  legis- 
lation tend  to  improve  the  health,  vigor,  efficiency,  and 
morals  of  the  workers  and,  consequently,  constitute  a  legiti- 
mate exercise  of  the  police  power  of  the  state. 

Laws  fixing,  for  example,  the  maximum  number  of  hours 
per  day  or  per  week  which  a  child  or  a  woman  may  work  in 
a  factory,  interfere  with  the  abstract  right  to  make  any  kind 
of  a  contract  which  an  individual  may  see  fit  or  be  forced  to 
make.  But  such  laws  are  now  held  to  be  constitutional; 
they  fall  within  the  scope  of  the  police  power  of  the  state, 
because  a  long  working  day  for  women  and  children  is  con- 
sidered to  be  injurious.  The  courts  were  much  more  re- 
luctant to  affirm  the  constitutionality  of  laws  interfering 
with  labor  contracts  made  by  adult  male  workers.  In  1898, 
however,  the  United  States  Supreme  Court  decided  that  a 
Utah  statute  fixing  eight  hours  as  the  legal  working  day  in 
mines  was  constitutional.  Mining  was  recognized  as  an  espe- 
cially dangerous  and  unheal thful  occupation.  Nearly  twenty 
years  later,  the  Supreme  Court  gave  the  police  power  much 
wider  scope  by  declaring  an  Oregon  law  constitutional  which 
fixed  at  ten  per  day  the  maximum  hours  of  labor  for  adult 
males,  except  in  emergencies,  in  manufacturing  industries. 
The  health  and  stamina  of  the  workers  were  safeguarded, 
and  the  limits  of  the  wage  bargain  contracted  by  this  im- 
portant decision. 

The  Advantage  of  a  Short  Working  Day.  The  success  of 
a  democratic  form  of  government  is  dependent  upon  the 
character  and  education  of  the  mass  of  its  citizens.  The 
long   working   day   tends   to   stupefy   and   brutalize;  the 


LABOR  LEGISLATION  145 

shorter  working  day,  on  the  other  hand,  tends  to  improve 
the  health  and  efficiency  of  the  workers,  to  reduce  the 
amount  of  dissipation  and  intemperance,  and  to  give  the 
workers  an  opportunity  to  enjoy  rational  and  uplifting  forms 
of  recreation.  A  short  working  day  makes  for  good  citizen- 
ship and  for  social  betterment.  "  The  first  school  of  morals, 
family  life,  is  a  closed  book  against  the  man  who  only  comes 
home  dead  tired  late  at  night."  A  long  working  day  is  an 
almost  insurmountable  obstacle  in  the  upward  path  of  the 
wageworkers;  and,  consequently,  is  undesirable  in  a  de- 
mocracy. But,  granting  these  points  in  regard  to  the  social 
value  of  a  short  working  day,  this  question  inevitably 
follows  :  Will  the  reduction  of  the  average  working  day  from 
twelve  or  more  hours  to  ten,  nine,  or  eight  reduce  the  output 
of  the  workers  of  the  nation  ?  This  is  an  important  question, 
and  sufficient  facts  are  at  hand  to  allow  a  fairly  convincing 
answer  to  be  given. 

In  the  soft  coal  industry  in  the  United  States  a  reduction 
from  ten  to  eight  hours  was  followed  by  an  increase  in  the 
average  daily  output  per  worker;  and  in  the  hard  coal  in- 
dustry a  reduction  from  nine  to  eight  hours  led  to  a  similar 
result.  A  large  shoe  manufacturing  company  found  that  a 
reduction  from  fifty-five  to  fifty-two  hours  per  week  re- 
sulted in  an  increased  output  per  emplo^^ee.  A  British 
official  committee  after  a  careful  investigation  of  the  health 
and  output  of  munition  workers  in  1916  and  1917  reported 
"  that  the  time  is  now  ripe  for  a  further  substantial  reduction 
in  the  hours  of  work."  The  facts  seem  to  warrant  the  fol- 
lowing statement :  The  eight-  and  the  nine-hour  day  make 
for  good  citizenship  and  social  uplift,  and  also  for  industrial 
efficiency  and  increased  national  output. 

For  years  organized  labor  in  the  United  States  has  been 


146  ELEMENTARY   ECONOMICS 

striving  to  secure  an  eight-hour  day.  In  1912,  it  was  esti- 
mated that  nearly  two  millions  of  wage  earners  were  working 
eight  hours  per  day.  An  official  investigation  indicated 
that,  in  1914,  nearly  twelve  per  cent  of  all  workers  in  manu- 
facturing plants  were  working  eight  hours  or  less  per  day. 
Since  1914  many  additions  have  been  made  to  the 
number  enjoying  the  shorter  working  day.  In  the  ten 
months  preceding  April  1,  1916,  one  authority  declared 
**  nearly  100,000  men  and  women  have  won  the  eight-hour 
day  in  the  United  States."  The  federal  statutes  provide 
for  an  eight-hour  day  for  laborers  working  for  the  federal 
government  or  on  governmental  contracts.  If  more  than 
eight  hours  is  worked  a  higher  wage  must  be  paid  for  over- 
time. This  law  may  be  set  aside  in  cases  of  extraordinary 
emergency. 

Chief  Forms  of  Labor  Legislation.  In  the  United  States, 
the  regulation  of  working  conditions  in  factories,  stores, 
offices,  and  other  work-places  is  a  state,  not  a  federal,  func- 
tion. The  federal  government  can  regulate  working  con- 
ditions in  the  District  of  Columbia  and  in  the  territories, 
and  in  the  case  of  its  own  employees.  In  1916,  Congress 
attempted  to  regulate  child  labor  in  the  states  by  passing 
a  law  prohibiting  manufacturers  from  placing  in  interstate 
commerce,  goods  produced  in  factories  employing  child 
labor.  This  attempt  to  regulate  factories,  through  the 
power  of  Congress  over  interstate  commerce,  was  declared 
unconstitutional  two  years  later.  Each  state  has  its  own 
particular  form  of  labor  legislation;  and  there  is  as  yet 
little  uniformity. 

Every  state  of  the  United  States  and  the  federal  govern- 
ment have  passed  much  legislation  in  regard  to  working 
conditions  in  factories  and  other  work-places.     Labor  legis- 


LABOR   LEGISLATION  147 

lation  relates  to  a  variety  of  different  subjects,  —  such  as 
provision  for  factory  inspectors,  the  limitation  of  the  length 
of  the  working  day  and  the  number  of  working  days  per 
week,  prohibition  of  night  work  and  of  Sunday  labor,  ex- 
clusion of  women  and  children  from  certain  kinds  of  employ- 
ment, provisions  for  frequent  payment  of  wages,  laws  fixing 
a  minimum  wage  for  women  and  children,  requiring  the  use 
of  certain  safety  appliances,  regulations  in  regard  to  sanitary 
conditions  in  factories  and  other  work-places.  The  enforce- 
ment of  labor  legislation  is  usually  placed  under  the  control 
of  a  commissioner  of  labor  or  an  industrial  commission  di- 
recting a  corps  of  factory  inspectors. 

Legislation  in  Regard  to  Child  and  Woman  Labor.  Every 
state  in  the  Union  has  passed  some  legislation  relating  to 
the  work  of  children.  The  typical  law  in  the  Northern 
and  Eastern  states  prohibits  the  employment  of  children 
under  fourteen  years  of  age  in  factories,  stores,  workshops, 
and  mines.  In  dangerous  or  unheal thful  employments,  the 
limit  is  raised.  In  the  street  trades  and  in  agriculture,  the 
limit  is  lower  or  no  limitation  is  provided.  As  a  rule  chil- 
dren between  the  ages  of  fourteen  and  sixteen  years  are 
obliged  to  obtain  working  papers  indicating  that  they  are 
in  good  health,  that  they  have  completed  a  minimum  amount 
of  schooling,  and  that  the  family  needs  their  earnings. 
Night  work  is  prohibited  in  some  of  the  states;  and  the 
working  day  for  children  is  fixed  in  many  states  at  eight  or 
nine  hours.  The  laws  in  the  Southern  states  are  less  rigid 
than  those  in  the  North;  but  the  standards  have  been 
raised  in  recent  years. 

The  great  majority  of  American  states  have  passed  laws 
regulating  the  labor  of  wage-earning  women.  Nearly  a 
score  of  states  provide  for  a  maximum  working  day  for 


148  ELEMENTARY   ECONOMICS 

women,  of  eight  or  nine  hours.  Night  work  is  prohibited 
in  a  few  states.  Many  health  regulations  relating  to  work- 
ing women  are  found  upon  our  state  statute  books.  Twelve 
states  have  passed  laws  fixing  a  minimum  wage  for  women 
and  children.  Employers  are  not  allowed,  under  penalty, 
to  pay  less  than  the  minimum  wage.  This  wage  is  usually 
determined  by  a  wage  board  and  is  the  amount  considered 
necessary  to  maintain  the  health  and  efficiency  of  the 
worker ;  it  is  a  '*  living  wage."  No  minimum  wage  law 
has  been  passed  in  the  United  States  for  adult  male  workers. 

Throughout  the  ages  women  and  children  have  performed 
much  hard  labor.  The  dangers  which  our  legislatures 
attempt  to  guard  against  are  found  in  connection  with  the 
conditions  of  work  in  our  factories,  sweat-shops,  offices, 
and  stores,  —  routine,  the  long  working  day,  insanitary 
conditions,  speeding-up,  etc.  Child  labor  in  modern  routine 
industry  is  an  economic  mistake  as  well  as  undesirable  from 
a  humanitarian  point  of  view.  A  child  is  not  only  entitled 
to  childhood,  but  we  are  coming  to  see  that  child  labor 
does  not  pay.  It  is  an  expensive  and  inefficient  form  of 
labor  for  the  employer  to  hire;  and  it  tends  to  make  in- 
efficient the  next  generation  of  adult  workers.  The  child 
forced  prematurely  into  routine  industry  is  obliged  to  forego 
desirable  schooling,  and  his  stamina  and  vigor  are  reduced. 
The  use  of  child  labor  in  mill  and  mine  is  like  "  grinding  the 
seed  corn."  The  agitation  against  gainful  child  labor  and 
in  favor  of  better  educational  facilities  for  the  youth,  is  an 
essential  part  of  the  program  for  the  conservation  of  human 
resources. 

It  seems  evident  that  women  are  to  play  a  larger  and 
larger  role  in  the  industrial  world.  An  attempt  to  stem 
the  tide  and  to  force  women  out  of  the  factory,  office,  and 


LABOR   LEGISLATION  149 

store  does  not  seem  feasible  or  desirable ;  the  problem  is  to 
improve  working  and  living  conditions  so  that  the  health 
and  stamina  of  the  wage-working  women  will  not  be  im- 
paired. The  solution  Hes  in  humanizing  industry.  The 
woman  wage  earner  is  not  an  abnormal  person.  Idleness 
or  the  performance  of  useless  or  unnecessary  work  is  un- 
desirable in  the  case  of  women  as  well  as  of  men.  The  work 
of  women  under  good  conditions  will  increase  the  productive 
capacity  of  the  nation  and  will  allow  a  further  reduction  of 
the  working  day,  or  an  increase  in  the  sum-total  of  necessi- 
ties, comforts,  and  luxuries  available  for  consumption,  or 
both. 

TOPICS  FOR   DISCUSSION 

1.  What  are  the  chief  provisions  of  your  state  law  in  regard  to 
the  work  of  women  and  children? 

2.  Of  men? 

3.  Who  is  charged  with  the  enforcement  of  these  laws  ? 

4.  How  many  wageworkers  in  your  city  or  town  are  employed 
eight  hours  per  day  ?     Nine  hours  ?     Twelve  hours  ? 


CHAPTER  XVII 
METHODS   OF  PAYING  FOR  LABOR 

The  wages  actually  paid  an  employee  are,  as  has  been 
indicated,  the  result  of  an  individual  or  a  collective  bargain. 
The  method  of  paying  for  labor  is  by  no  means  a  matter  of 
indifference.  Employers  are  eager  to  adopt  a  plan  which 
will  stimulate  the  worker  to  produce  in  an  efficient  manner ; 
they  wish  a  large  output  of  good  quality  unaccompanied  by 
unnecessary  waste  of  materials  or  excessive  wear  and  tear 
upon  the  machinery  utilized.  The  employees  desire  to  in- 
crease the  wage  rate;  but  they  object  to  overdriving  or 
"  sweating."  Under  slavery  practically  the  only  incentive 
was  fear;  under  the  wage  system,  the  desire  for  income, 
which  enables  the  worker  to  get  a  living  for  himself  and 
family,  is  the  chief  incentive  for  the  great  majority  of  wage- 
workers.  Many  different  methods  have  been  and  are  still 
used  in  paying  for  labor.  In  this  chapter,  five  systems  will 
be  briefly  presented,  —  time  wage,  piece  wage,  premium 
plans  and  scientific  management,  profit  sharing,  and  coopera- 
tion. Cooperation  is,  strictly  speaking,  not  a  method  of 
wage  payment ;  it  is,  in  reality,  a  scheme  for  social  reform. 
The  time  and  piece  wage  systems  are  the  fundamental  plans ; 
other  methods  are  merely  modifications  of  one  of  these 
systems. 

Time  Wage.  In  the  time  wage  plan,  the  base  upon  which 
payment  is  made  is  a  unit  of  time,  —  one  hour,  one  day,  one 
week,  one  month.  The  employee  receives  the  stipulated 
wage  for  each  unit  of  time  employed  irrespective  of  his 

150 


METHODS   OF   PAYING   FOR    LABOR  151 

output  for  that  period.  More  efficient  and  less  efficient 
employees  may  receive  the  same  wage.  Of  course,  if  a 
worker  habitually  produces  little,  he  will  sooner  or  later  be 
discharged.  Under  the  time  wage  system,  the  tendency 
is  for  wages  to  be  nearly  uniform  for  all  workers  in  a  given 
factory  performing  a  certain  kind  of  work.  There  is  little 
incentive  for  the  fast  and  skillful  man  to  quicken  his  pace 
and  increase  the  amount  or  improve  the  quality  of  his  output 
per  day.  The  time  wage  plan  is  favored  by  many  labor 
organizations.  In  case  the  material  used  is  very  expensive 
or  the  machinery  employed  is  delicate  and  costly,  employers 
usually  favor  the  time  wage  system. 

Piece  Wage.  Under  this  plan  the  workers  are  paid 
according  to  the  quantity  of  work  finished.  If  a  man  com- 
pletes one  hundred  operations  in  a  day,  his  wage  may  be, 
for  example,  three  dollars,  —  three  cents  per  operation.  If 
he  had  completed  only  seventy-five  operations  his  wage 
would  have  been  reduced  to  two  dollars  and  twenty-five  cents 
per  day.  The  wage  received  depends  upon  the  output  of 
the  individual  worker.  The  worker  is  furnished  a  very 
direct  incentive  for  speeding  up.  As  a  consequence,  quality 
is  in  danger  of  being  sacrificed  to  speed  under  the  piece 
work  plan.  Piece  rates  are  based  on  the  principle  of  stren- 
uosity,  not  that  of  efficiency.  The  workers  often  refrain 
from  speeding  up  because  they  fear  the  employer  will  cut 
the  piece  rate  if  they  earn  more  than  is  the  customary  time 
wage  for  the  same  class,  of  work.  Piece  workers,  therefore, 
often  deliberately  restrict  their  output. 

Premium  Plans  and  Scientific  Management.  The  diffi- 
culties connected  with  both  time  and  piece  wages  have  led 
employers  to  seek  another  form  of  wage  payment.  The 
premium   plan   is,   generally   speaking,    a   combination   of 


152  ELEMENTARY   ECONOMICS 

the  time  and  piece  wage.  The  worker  as  a  rule  receives  his 
day  wage  irrespective  of  the  amount  turned  out  by  him  in  a 
day;  but,  if  his  output  exceeds  a  certain  amount,  he  is 
given  a  premium  or  bonus  in  addition  to  his  day  wage.  The 
greater  the  excess  over  the  base,  the  larger  the  premium. 
As  in  the  piece  wage  system,  the  worker  is  given  a  potent 
incentive  to  increase  his  output.  The  essential  difference 
between  the  two  systems  is  found  in  the  method  of  fixing 
the  rate.  The  piece  rate  wage  is  usually  the  result  of  a 
more  or  less  intelligent  guess.  Under  scientific  management 
the  premium  rate  is  fixed  after  careful  study  of  the  amount 
which  an  efficient  worker  ought  to  turn  out  in  a  given  work- 
ing period.  The  employer  then  promises  not  to  cut  the 
rate  unless  some  change  is  made  in  the  methods  employed. 
One  of  the  functions  of  scientific  management  is  to  ascertain 
what  is  a  fair  day's  work ;  and  another  is  to  determine  the 
premium  rate  which  will  give  the  worker  the  incentive  to 
do  more. 

Scientific  management  or  efficiency  engineering  also  aims 
to  ascertain  the  most  effective  way  of  doing  a  given  job 
whether  it  be  shoveling  coal,  handling  pig  iron,  laying  bricks, 
or  cutting  steel  in  a  lathe.  Every  operation  from  tying  a 
necktie  to  building  a  Panama  Canal  may  be  done  in  an 
efficient  or  an  inefficient  manner.  Scientific  methods  are 
those  which  enable  the  job  to  be  done  in  the  most  effective 
way  with  the  least  possible  waste  of  energy.  Labor  power 
is  now  a  measurable  quantity.  Under  this  system  the 
efficiency  of  a  worker  is  measured  as  definitely  as  electrical 
energy  or  steam  power  may  be  ascertained.  The  adoption 
of  scientific  methods  marks  the  end  of  rule-of -thumb  processes 
and  guesswork.  Under  scientific  management  unnecessary 
motions  are  eliminated,  the  proper  sequence  of  operations  is 


METHODS   OF   PAYING   FOR   LABOR  153 

ascertained,  and  the  best  routing  of  materials  and  of  partially 
finished  products  is  determined.  Some  of  the  gains  made 
as  the  result  of  motion  study  and  the  application  of  scientific 
principles  to  such  work  as  bricklaying  or  shoveling,  are  con- 
siderable. For  example,  it  is  reported  that  through  the  use 
of  scientific  management  one  company  "  cut  its  shop  force 
from  one  hundred  to  seventy  men,  and  at  the  same  time 
increased  its  output  three  hundred  per  cent." 

Organized  labor  has  quite  consistently  opposed  the  in- 
troduction of  scientific  management.  The  workers  fear 
that  it  only  means  some  subtle  and  new-fangled  scheme  to 
overdrive  them.  They  point  to  the  fact  that  scientific 
management  has  been  introduced  by  the  employers  without 
consultation  with  the  workers  affected;  and  that  it  is 
planned  by  experts  hired,  controlled,  and  compensated  by  the 
employers.  In  theory,  scientific  management  will  help  the 
workers;  in  actual  practice,  in  too  many  cases  the  workers 
have  received  very  little  or  no  beneficial  results.  The  op- 
position of  organized  labor  to  scientific  management  would 
doubtless  be  removed  in  a  large  measure  if  the  workers 
were  given  a  voice  in  determining  the  methods  to  be  em- 
ployed. 

Profit  Sharing.  Profit  sharing  supplements,  but  does 
not  modify  in  any  important  manner,  the  ordinary  methods 
of  paying  wages.  The  workers  are  paid  time  or  piece  wages, 
and  at  the  end  of  a  definite  period  of  time,  usually  one  year, 
a  portion  of  the  profits  is  divided  among  them.  This  dividend 
is  a  gift  made  by  the  employer.  If  profit  sharing  is  under- 
taken by  the  employer  as  a  business  proposition  instead  of 
a  matter  of  philanthropy,  the  end  in  view  is  greater  output, 
less  waste  of  material,  less  wear  and  tear  upon  machinery, 
and  a  more  stable  labor  force.     Under  the  ordinary  wage 


154  ELEMENTARY   ECONOMICS 

system,  wages  are  fixed  at  a  contractual  amount;  ordinary 
fluctuations  in  business  activity  do  not  affect  the  rate  paid. 
But  the  profits  to  be  divided  under  profit  sharing  are  subject 
to  all  the  vicissitudes  of  business,  for  profits  depend  upon 
the  ability  of  the  enterpriser,  the  conditions  of  the  market, 
the  efficiency  of  the  factory  organization  as  well  as  upon 
the  efficiency  of  each  and  every  individual  worker.  The 
wageworkers  may  put  forth  their  best  efforts  as  the  result 
of  a  promise  to  share  profits  and  yet,  owing  to  bad  manage- 
ment or  adverse  business  conditions,  receive  no  extra  bonus 
at  the  end  of  the  financial  year.  Under  piece  wages  or  the 
premium  plan  the  amount  of  the  bonus  depends  almost 
entirely  upon  the  individual  workman,  and  the  extra  amount 
earned  is  found  in  the  next  pay  envelope  instead  of  six  or 
twelve  months  later.  The  incentive  offered  by  profit  shar- 
ing has  not  proved  very  potent  in  its  effect  upon  individual 
workers. 

Profit  sharing  has  been  tried  in  only  a  comparatively 
small  number  of  American  factories.  In  1916,  only  sixty 
establishments  in  the  United  States  were  using  some  form 
of  profit  sharing;  one  third  of  this  number  had  adopted  it 
within  three  years ;  and  only  eight  out  of  the  total  number 
adopted  the  plan  before  1900.  Only  five  of  the  sixty  es- 
tablishments employ  over  one  thousand  workers.  Labor 
organizations  oppose  profit  sharing.  Labor  leaders  feel 
that  a  wage  earner  who  is  also  a  profit  sharer  will  be  less 
loyal  to  his  union  than  one  who  receives  only  wages.  Union- 
ists demand  higher  wages  rather  than  a  share  in  the  profits. 

To  members  of  a  labor  organization  the  strength  of  the 
union  is  of  first  importance;  any  plan  of  wage  payment 
which  is  considered  to  be  a  menace  to  the  solidarity  of 
labor  will  meet  the  opposition  of  organized  labor.     Profit 


METHODS   OF   PAYING   FOR   LABOR  155 

sharing  has  been  most  successful  in  plants  which  are  not 
subjected  to  fierce  competition.  A  firm  enjoying  large 
monopoly  profits  can  adopt  profit  sharing  with  excellent 
prospects  of  success. 

*'  Working  on  shares  "  may  be  called  a  crude  form  of 
profit  sharing.  In  farming  and  in  fishing,  working  on 
shares  is  not  uncommon.  Welfare  work  also  has  some  of 
the  earmarks  of  profit  sharing.  Many  employers  in  recent 
years  have  given  much  attention  to  improving  working 
conditions  in  the  factory,  —  better  lighting,  improved 
sanitation,  shower  baths,  rest-rooms,  gymnasiums,  meals 
at  cost  served  in  an  attractive  dining  room.  Attention 
has  also  been  directed  toward  the  home  environment  of 
the  workers.  "  Model  houses  "  have  been  erected ;  these 
houses  have  been  sold  or  rented  to  the  workers  at  reason- 
able rates.  Cooperative  stores  have  been  established; 
and  night  schools  and  kindergartens  provided.  Welfare 
work  has  taken  on  many  different  aspects.  In  brief,  it  is  a 
movement  fostered  by  employers  looking  toward  better 
working  and  living  conditions  for  wageworkers.  Organized 
labor  insists  that  welfare  work  must  not  be  used  as  a  sub- 
stitute for  higher  wages.  In  short,  they  prefer  more  money 
in  the  pay  envelope  to  shower  baths  and  flower  gardens  in 
their  work-places. 

Cooperation.  Cooperation  is  a  form  of  democracy  in 
industry.^  A  factory  operated  under  cooperative  methods 
will  be  managed  by  the  workers  in  that  factory ;  the  workers 
collectively  constitute  the  enterpriser.  To  the  workers, 
therefore,  go  both  wages  and  profits.  The  workers  select 
the  superintendent,  and  determine  the  policy  of  the  organiza- 

'  See  also  the  section  on  Cooperation  in  the  chapter  on  Forms  of  Business 

Crganizat'on. 


156  ELEMENTARY   ECONOMICS 

tion.  In  the  pure  form  of  producers'  cooperation  each  worker 
will  have  one  vote,  and  all  workers  in  the  plant  will  be 
members  of  the  cooperative  association.  The  employer  is 
eliminated ;  the  workers  literally  employ  themselves.  They 
furnish  or  borrow  the  capital  necessary  to  carry  on  the 
enterprise.  Theoretically  the  system  appeals  to  the  lovers 
of  equality;  but,  in  actual  practice,  few  attempts  at  pro- 
ducers' cooperation  have  been  successful.  The  most  notable 
example  in  the  United  States  has  been  furnished  by  the 
flour-barrel  coopers  of  Minneapolis. 

The  difficulties  are  many.  In  the  first  place,  a  manual 
worker  rarely  places  sufficient  emphasis  upon  managerial 
ability;  and,  hence,  the  managers  chosen  are  poorly  paid 
and  are  as  a  rule  inefficient.  In  the  second  place,  a  success- 
ful cooperative  establishment  almost  inevitably  drifts 
toward  the  condition  of  a  corporation.  The  original  mem- 
bers wish  to  keep  the  profits  for  themselves.  Soon  they 
begin  to  hire  workers,  paying  the  latter  ordinary  wages  instead 
of  admitting  them  as  cooperators.  Presently  cooperation 
in  the  establishment  is  a  matter  of  history;  and  the  plant 
is  really  operated  by  a  partnership  or  by  a  corporation. 
It  is  also  difficult  for  cooperating  workmen  to  obtain  suffi- 
cient capital  efficiently  to  carry  on  many  lines  of  business. 
In  a  complex  industry  in  which  many  grades  of  workers 
skilled  and  unskilled  are  employed,  the  question  of  relative 
shares  in  the  proceeds  is  a  rock  upon  which  the  cooperative 
concern  is  likely  to  be  shipwrecked.  The  unskilled  object 
to  allowing  the  skilled  a  much  larger  per  capita  percentage 
than  the  former  receive;  and  the  skilled  emphasize  the 
difference  between  the  two  grades  of  labor.  The  most 
successful  examples  of  producers'  cooperation  are  found  in 
industries  in  which  there  is  little  gradation  of  labor,  in  which 


METHODS   OF   PAYING   FOR   LABOR  157 

the  amount  of  capital  required  is  small,  and  in  which  the 
work  of  the  enterpriser  is  reduced  to  a  minimum.  The 
flour-barrel  industry  conforms  fairly  well  to  these  require- 
ments. 

The  more  important  form  of  cooperation  is  found  among 
consumers  rather  than  among  producers.  The  cooperative 
store  has  proved  successful  in  many  cases,  particularly  in 
England.  In  a  cooperative  store,  interest  is  paid  upon 
the  capital  invested;  the  profits  over  and  above  expenses 
are  divided  among  the  purchasers,  who  are  members  of  the 
cooperative  association  in  proportion  to  the  amount  of  their 
purchases.  That  is,  the  profits  go  to  the  cooperators  in- 
stead of  to  an  enterpriser.  The  clerks  and  the  manager 
of  the  store  are  paid  wages.  To  be  a  member  of  the  as- 
sociation, a  person  must  buy  at  least  one  share  of  the  stock 
of  the  association.  But,  unlike  a  corporation,  each  mem- 
ber is  allowed  only  one  vote  irrespective  of  the  number  of 
shares  he  may  have  purchased.  Many  cooperative  enter- 
prises have  been  started  among  farmers,  —  such  as  coopera- 
tive creameries  and  grain  elevators,  and  cooperative  as- 
sociations for  marketing  fruit.  The  familiar  building  and 
loan  associations  are  also  forms  of  cooperative  enterprises. 
Cooperation  among  consumers  does  not,  of  course,  affect 
directly  money  wages ;  but,  by  reducing  the  purchase  prices 
of  consumable  goods,  consumers'  cooperation  tends  to  in- 
crease wages  in  terms  of  consumable  goods,  that  is,  real  wages. 

TOPICS  FOR  DISCUSSION 

1.  Do  you  know  of  any  factories  in  your  commumty  in  which 
time  wages  are  paid? 

2.  Piece  wages? 

3.  Some  form  of  the  premium  plan  used  ? 

4.  Are  there  any  examples  of  profit  sharing? 

5.  Of  a  factory  operated  under  cooperative  management  ? 


CHAPTER  XVIII 
AGRICULTURAL  ECONOMICS 

Farming  Is  a  Business.  Agriculture  is  a  basic  industry. 
In  a  crisis  a  nation  can  dispense  with  many  forms  of  human 
endeavor  and  many  kinds  of  industry;  but  the  farming 
business  must  go  on.  In  the  early  history  of  the  United 
States,  farming  was  the  chief  occupation  of  the  great  ma- 
jority of  Americans.  To-day,  it  is  rivaled  by  manufacture, 
transportation,  and  mining.  About  one-third  of  all  persons 
gainfully  employed  in  1910  were  reported  as  engaged  in 
agriculture;  and  the  estimated  value  of  all  farm  property 
was  approximately  one-fourth  of  the  estimated  wealth  of 
the  nation. 

The  farmer  of  to-day  is  truly  a  business  man;  he  pro- 
duces chiefly  for  sale  —  for  a  market.  The  pioneer  farmer 
and  his  family  on  the  other  hand  consumed  nearly  all  that 
was  produced  upon  the  farm;  httle  was  sold  and  little 
purchased  by  the  pioneer  farmer.  The  frontier  farm  was 
almost  a  self-contained  unit. 

Peculiarities  of  the  Business  of  Farming.  Farming  con- 
sidered as  a  business  or  a  means  of  getting  a  living  has, 
however,  several  peculiarities  which  quite  clearly  distinguish 
it  from  all  other  industries.  These  peculiarities  are  less 
marked  in  the  case  of  the  modern  marketing  farmer  than 
in  the  case  of  the  pioneer.  (1)  The  farmer  comes  into  very 
close  touch  with  nature.  His  work  brings  him  daily  into 
contact  with  the  soil  and  vegetation;  it  does  not  oblige 
him  to  cooperate  or  work  with  other  men  to  the  extent  that 
manufacturing,  mining,  and  merchandising  do.     His  busi- 

158 


AGRICULTURAL   ECONOMICS  159 

ness  does  not  require  the  careful  cultivation  of  the  social 
graces;  he  therefore  often  appears  at  a  disadvantage  in 
social  and  political  gatherings.  (2)  The  pioneer  farmer 
has  often  been  lauded  as  an  independent  man.  He  was  in 
a  large  degree  independent  of  social,  political,  and  business 
considerations;  but  on  the  other  hand  he  was  peculiarly 
dependent  upon  weather  conditions,  and  the  danger  of  loss 
from  pests  of  various  kinds  was  ever  present.  The  market- 
ing farmer  is  almost  as  dependent  upon  political  and  bus- 
iness considerations  as  other  business  men.  He  is  vitally 
interested  in  railway  rates,  banking  laws,  credit  facilities, 
and  the  control  of  middlemen.  And  some  farmers  are 
becoming  nearly  as  independent  of  weather  conditions  as 
the  manufacturer,  —  for  example,  the  farmer  upon  irrigated 
land  and  the  market  gardener  who  works  under  glass. 

(3)  Subdivision  of  labor  has  proceeded  much  further  in 
manufacturing,  transportation,  mining,  and  mercantile  pur- 
suits than  in  agriculture  Farming  is  relatively  a  small- 
scale  industry;  and  small-scale  industry  offers  slight  op- 
portunity for  subdivision  of  labor.  Farming  is  also  a 
seasonal  industry;  the  character  of  the  work  performed 
changes  from  season  to  season  and  from  day  to  day.  No 
two  days  have  exactly  the  same  routine ;  and  an  unexpected 
change  in  the  weather  will  upset  any  carefully  planned 
program  of  farm  work.  The  farmer  is  even  to-day  a  non- 
specialized  worker.  He  must  be  able  to  plow,  sow,  culti- 
vate, reap,  repair  implements  and  fences,  milk  cows,  care  for 
horses  and  stock,  and  perform  a  multitude  of  other  duties. 
The  efficient  farmer  is  a  versatile  and  ingenious  man.  He 
should  not  only  understand  the  best  methods  of  doing 
farm  work;  but  he  also  must  understand  soils,  he  must 
study  market  conditions,  he  must  know  how  to  fight  insect 


160  ELEMENTARY   ECONOMICS 

pests,  and  he  should  be  able  to  keep  simple  farm  accounts. 
The  efficient  farmer  of  to-day  is  a  worker  and  an  enter- 
priser. The  distinct  separation  between  the  capitalist,  the 
enterpriser,  and  the  worker  which  is  characteristic  of  manu- 
facture, mining,  and  transportation,  is  as  yet  rarely  found 
in  agriculture.  The  farmer  works  with  his  farm  laborers, 
if  indeed  he  hires  such  assistance. 

(4)  The  farm  family,  like  all  families  under  more  primi- 
tive industrial  conditions,  is  united  in  an  industrial  way. 
Each  member  of  the  household  contributes  his  bit  to  the 
farm  business.  In  manufacture,  mining,  transportation, 
and  nearly  all  other  forms  of  business  activity,  the  home 
life  and  household  activity  are  sharply  separated  from 
business  activity ;  and  different  members  of  the  family  are 
often  engaged  in  quite  different  work.  The  rural  family  is 
a  united  working  force,  and  all  members  work  together  for 
a  common  end;  the  urban  family  constitutes  a  divided 
working  force.  Unity  in  the  essential  endeavor  to  earn  a 
living  undoubtedly  makes  for  family  stability.  The  wife 
of  the  farmer  is  in  reality  his  business  partner;  and  the 
location  of  the  farm  definitely  fixes  the  residence  of  the 
farmer.  (5)  Manufacture  tends  to  produce  the  massing  of 
population  in  industrial  towns  and  cities;  farming  because 
of  the  large  space  required  by  each  farm  unit,  causes  the 
farming  population  to  live  in  relative  isolation.  (6)  The 
isolation  of  the  farm  and  the  small-scale  form  of  the  average 
farm  unit,  have  made  it  difficult  for  farmers  to  cooperate 
with  each  other  and  to  do  teamwork  in  organizations  for 
the  benefit  of  the  rural  community.  The  farmer  is  hard 
to  "  socialize." 

Agricultural  Statistics.  In  the  United  States,  according 
to  the  Census  of  1910,  there  were  6,361,502  farms.     The 


AGRICULTURAL  ECONOMICS  161 

average  number  of  acres  per  farm  was  138.  The  average 
value  of  all  farm  property  per  farm  was  $6444;  of  which, 
$4476  represented  the  value  of  the  land.  During  the  decade, 
1900  to  1910,  the  value  of  the  farm  land  per  farm  in  the 
United  States  practically  doubled;  and  the  value  of  all 
farm  property  per  farm  increased  about  80  per  cent.  This 
extraordinary  increase  in  farm  values  was  due  in  part  to 
changes  in  the  value  of  gold.  The  total  value  of  farm  prop- 
erty per  farm  in  1860  was  slightly  less  than  in  1900.  The 
average  number  of  acres  per  farm  in  1860  was  199  and  in 
1900,  146. 

Farm  Tenancy.  As  a  rule,  a  farm  is  more  efficiently 
operated  by  the  owner  than  by  a  tenant.  Tenancy  is  par- 
ticularly undesirable  when  the  landowner  lives  at  a  con- 
siderable distance  from  the  farm  and  when  a  tenant  only 
remains  on  a  farm  for  one  or  two  years.  Under  such  con- 
ditions, the  rented  farm  is  usually  "  skinned  "  or  "  mined  "  ; 
the  soil  deteriorates  and  the  buildings  and  fences  decay. 
Fortunately,  absentee  landlordism  has  not  as  yet  assumed 
alarming  proportions  in  this  country.  In  1910,  63  per  cent 
of  the  farms  were  operated  by  the  owners;  in  1900,  the 
percentage  was  64.7.  Of  the  37  per  cent  operated  by 
tenants,  three-fourths  were  owned  by  landlords  living  in 
the  same  county  in  which  the  farm  was  located.  Tenancy 
is  high  in  several  Southern  states  on  account  of  the  large 
number  of  Negroes  renting  small  farms.  With  some  ex- 
ceptions, the  percentage  of  tenancy  in  the  North  is  highest 
where  land  values  are  high,  where  the  investment  required 
of  the  owner  is  considerable. 

Farm  Labor.  The  farmer  has  a  "  labor  problem."  It  is 
difficult  for  farmers  to  obtain  an  adequate  supply  of  efficient 
workers;  and  from  year  to  year  they  loudly  bewail  the 


162  ELEMENTARY   ECONOMICS 

scarcity  of  farm  laborers.  The  reasons  for  this  situation  are 
many.  The  demand  for  workers  on  the  farm  fluctuates 
greatly  within  a  given  year.  The  need  for  workers  is  most 
pressing  in  the  fall  during  the  harvesting  season;  in  the 
winter,  on  the  contrary,  few  extra  helpers  are  required. 
The  working  day  is  long  and,  as  a  rule,  indefinite.  The 
opportunities  for  recreation  and  social  enjoyment  are  few 
and  inadequate.  In  many  cases  the  housing  accommoda- 
tions are  very  poor,  —  often  worse  than  in  the  case  of  factory 
workers. 

In  short,  city  employment  with  a  higher  money  wage,  a 
shorter  working  day,  more  regular  hours,  better  oppor- 
tunities for  recreation  and  less  of  isolation,  is  the  magnet 
which  has  drawn  many  of  the  best  workers  away  from 
agriculture.  There  are  perhaps  5,000,000  agricultural  la- 
borers. The  typical  member  of  this  group,  if  located  west 
of  the  Mississippi  River,  is  a  migratory  or  drifting  worker. 
He  works  here  to-day  and  elsewhere  next  week ;  and  in  the 
winter  he  drifts  into  the  cities  too  often  only  to  add  to  the 
amount  of  idleness  and  debauchery  in  those  centers  of 
population. 

Rural  Social  Problems.  Too  many  capable  persons  have 
been  leaving  agriculture  for  other  occupations  and  oppor- 
tunities. In  the  past,  the  rural  districts  have  constituted 
the  reservoir  from  which  the  cities  have  received  their  best 
leaders.  To-day  cities  must  very  largely  recruit  their  ranks 
from  within ;  but  it  is  still  of  prime  importance  that  the 
quality  of  the  rural  population  be  maintained  at  a  high  level. 
The  ^*  rural  exodus  "  has  not,  however,  been  entirely  a  move- 
ment from  the  farms  to  the  cities.  With  the  passing  of 
recent  decades  certain  small  rural  industries  such  as  black- 
smithing  have   very  largely  disappeared.    The   sons  and 


AGRICULTURAL  ECONOMICS  163 

daughters  of  the  village  and  crossroads  blacksmith  are  now 
living  in  the  city.  Many  farmers  have  moved  farther  west 
or  to  Canada.  During  the  last  two  or  three  decades  the 
strictly  rural  population  living  in  the  open  country  or  in 
small  villages  under  2500  inhabitants,  has  been  actually 
reduced  in  numbers  in  many  of  the  older  states.  For  ex- 
ample, out  of  a  solid  block  of  twenty-eight  counties  in  South- 
eastern Michigan  only  one  county  increased  in  rural  popu- 
lation from  1900  to  1910.  The  percentage  of  the  entire 
population  of  the  United  States  living  in  the  rural  district 
was,  in  1860,  70.5;  in  1890,  63.9;  in  1900,  59.5;  and  in 
1910,  53.7.  It  is  true  that  many  old-time  jobs  such  as  the 
making  of  tools  and  implements,  the  slaughtering  of  cattle 
and  hogs,  the  manufacture  of  cheese  and  butter,  have  been 
transferred  from  the  farm  and  the  rural  hamlet  to  the  factory 
and  the  city;  and  it  is  also  true  that  improved  machinery 
and  motive  power  enables  the  same  amount  of  man-power 
to  cultivate  efficiently  a  greater  acreage  of  ground;  but  in 
spite  of  these  facts,  students  of  rural  conditions  are  of  the 
opinion  that  more  attention  should  be  given  to  the  prob- 
lems of  the  farmer  and  of  the  rural  community.  Why  are 
so  many  of  the  virile  and  ambitious  young  men  and  women 
turning  their  faces  cityward  ? 

No  definite  and  entirely  satisfactory  answer  can  be  given 
to  this  question;  but  a  few  hints  may  be  offered.  In  the 
cities  are  found  crowding,  hustle,  noise,  allurement,  excite- 
ment, opportunity  for  distinction  and  wealth.  In  the 
cities  also  are  to  be  found  good  sanitation,  playgrounds, 
well-organized  schools,  well-equipped  churches,  public 
libraries,  social  centers,  and  varied  opportunities  for  amuse- 
ment and  recreation.  Farmers  rarely  attain  to  great  wealth, 
distinction,  or  political  preferment.    The  best  and  the  worst 


164  ELEMENTARY   ECONOMICS 

sides  of  life  seem  to  be  found  in  our  large  population  centers. 
To  many  persons  the  rural  districts  appear  to  offer  only  the 
chance  for  hard  work,  small  income,  mediocrity,  and  mo- 
notony. The  lure  of  the  farm  may  be  strengthened  by 
increasing  the  income  of  the  farmer  through  greater  in- 
dividual efficiency  and  through  the  association  of  farmers 
in  organizations  which  are  not  unlike  labor  organizations. 
Better  rural  schools,  consolidated  and  more  prosperous 
rural  churches,  opportunities  for  social  gatherings  and 
wholesome  recreation,  improvement  of  roads  and  of  other 
means  of  transportation  and  communication,  are  also  potent 
agents  in  adding  to  the  attractiveness  of  rural  life.  Agri- 
culture and  the  rural  districts  will  attract  and  retain  the 
leaders  of  this  or  any  other  generation  only  when  the  op- 
portunities and  enjoyment  afforded  compare  favorably 
with  those  of  other  occupations  and  of  urban  life. 


CHAPTER  XIX 
INSURANCE 

What  is  Insurance?  Insurance  is  a  method  of  coopera- 
tion in  the  bearing  of  risks  against  such  emergencies  as  fire, 
death,  sickness,  and  a  multitude  of  other  misfortunes  which 
are  quite  certain,  within  a  given  period,  to  come  to  a  fairly 
definite  number  of  persons  belonging  to  a  large  group. 
That  a  certain  percentage,  ^or  example,  of  100,000  persons 
will  die  within  a  year  can  be  predicted  with  a  fair  degree  of 
accuracy;  but  which  particular  individuals  will  die  is  not 
ascertainable.  Property  may  be  insured  against  many  kinds 
of  risks  such  as  of  fire,  tornadoes,  floods,  theft.  The  in- 
sured persons  or  the  owners  of  insured  property  pay  a  small 
annual  premium;  and  those  of  the  total  number  insured, 
or  their  families,  to  whom  comes  the  misfortune  insured 
against,  receive  an  indemnity  which  partially  or  wholly 
compensates  for  the  loss  sustained. 

Insurance  of  property  may  be  considered  as  an  expense 
of  doing  business.  A  manufacturing  plant  insures  its  build- 
ings and  equipment  against  fire  or  a  wind  storm.  A  cargo  of 
goods  shipped  by  railway  or  by  steamboat  is  usually  insured. 
If  the  building  burns  or  the  cargo  is  lost,  the  owner  is  recom- 
pensed by  the  insurance  company;  and  the  former  con- 
tinues his  business  without  the  great  financial  strain  and 
the  danger  of  bankruptcy  which  would  often  follow  in  case 
no  insurance  were  carried.  On  the  other  hand,  life  insur- 
ance may  be  considered  to  be  a  form  of  savings.  In  the  case 
of  the  death  of  the  breadwinner  of  a  family,  the  widow  and 

165 


166  ELEMENTARY   ECONOMICS 

the  children  will  be  assured  an  income  or  a  lump  sum  of 
money  from  the  insurance  company.  Banks  usually  insist 
that  property  offered  as  security  for  loans  be  insured.  Ac- 
ceptances based  upon  shipments  of  goods  are  readily  dis- 
counted by  banks  if  the  shipments  are  insured.^  Insurance 
plays  a  very  important  role  in  business  affairs  of  to-day. 
The  amount  of  the  policies  of  American  life  insurance  com- 
panies in  force  at  the  end  of  the  year  1916  was  over  twenty- 
one  billions  of  dollars.^  In  addition,  much  life  insurance  is 
carried  by  insurance  fraternal  orders.  The  life  and  property 
insurance  companies  have  enormous  sums  of  money  in- 
vested in  many  kinds  of  financial  securities.  Each  state  has 
passed  rigid  laws  regulating  the  management  of  insurance 
companies. 

Social  Insurance.  Social  insurance  is  a  special  form  of 
insurance  which  is  designed  to  protect  wage  earners  from 
certain  misfortunes  to  which  they  are  especially  exposed. 
The  forms  of  insurance  described  above  are  purely  volun- 
tary; but  social  insurance  is  usually  compulsory.  The 
chief  kinds  of  social  insurance  are  :  workingmen's  compensa- 
tion or  insurance  against  industrial  accidents,  health  (or 
sickness)  insurance,  insurance  against  invalidity  and  old 
age,  and  involuntary  unemployment  insurance.  Until 
recent  years  Americans  have  urged  that  workingmen,  by 
means  of  thrift,  should  individually  prepare  to  meet  these 
emergencies.  But  experience  has  conclusively  proved  that 
for  the  great  mass  of  wageworkers,  savings  are  inadequate 
to  afford  protection  against  the  ordinary  vicissitudes  of 
life.  Large  numbers  of  families  in  the  United  States  do 
not  receive  sufficient  income  to  warrant  any  attempt  to 

1  See  Chapter  X. 

2  Reported  to  the  New  York  Insurance  Department.  Some  American 
insurance  companies  do  not  report  to  the  New  York  authorities. 


ESTSURANCE  167 

save  for  old  age  or  for  the  proverbial  "  rainy  day/'  With- 
out some  form  of  social  insurance,  too  many  families  in  the 
wage-working  group  are  forced  because  of  accident,  illness, 
or  unemployment  to  accept  public  or  private  charity  with 
its  accompaniment  of  humiliation  and  loss  of  efficiency. 
Social  insurance  is  the  modern  and  humane  method  of 
making  provisions  for  the  ordinary  misfortunes  of  the 
family  receiving  a  small  income. 

Workingmen's  Compensation..  Insurance  against  indus- 
trial accidents  is  the  only  form  of  social  insurance  which  as 
yet  has  found  a  foothold  in  the  United  States.  The  im- 
portant European  nations  have  preceded  the  American 
states  in  adopting  systems  of  social  insurance.  The  first 
fairly  adequate  American  compensation  law  was  passed  in 
New  York  in  1910 ;  this  act  was  soon  after  declared  uncon- 
stitutional. The  first  law  to  stand  the  legal  tests  was 
passed  by  the  legislature  of  Massachusetts  in  1911.  By 
May,  1918,  thirty-eight  states  and  the  federal  government 
(for  federal  employees)  had  passed  compensation  acts; 
and  these  acts  whether  compulsory  or  optional  are  now 
held  to  be  constitutional. 

While  these  laws  differ  in  details,  the  essential  features 
are  not  greatly  dissimilar.  The  expense  of  the  system  is 
paid  by  the  employer;  it,  like  the  cost  of  fire  insurance,  is 
considered  to  be  a  regular  expense  of  the  business.  An 
industry  in  which  the  hazards  are  considerable  will  be  re- 
quired to  pay  higher  premiums  or  compensation  than  one 
which  is  less  hazardous.  An  employer  who  neglects  to 
guard  his  machinery  will  be  forced  to  pay  higher  premiums 
for  accident  insurance  than  his  competitor  who  installs 
safety  appliances.  A  well-drawn  compensation  act  makes 
"  safety  first  "  profitable ;  it  lowers  the  expense  of  operation 


168  ELEMENTARY   ECONOMICS 

by  reducing  the  amount  paid  to  workmen  because  of  acci- 
dents. 

The  amount  of  the  compensation  paid  because  of  the 
non-fatal  injury  of  an  employee  is  usually  determined  by 
paying  during  disability  a  percentage  of  the  average  wages 
earned  by  the  worker.  In  the  best  laws  the  percentage  is 
fixed  at  sixty-six  and  two-thirds.  In  the  case  of  a  fatal 
accident,  the  family  receives  a  percentage  of  the  weekly 
wage  of  the  deceased.  Th^  exact  percentage  is  determined 
by  the  number  of  dependents.  The  amount  allowed  each 
child  should  be  paid  until  the  child  dies  or  reaches  the  age 
of  eighteen  years.  The  widow  should  receive  compensa- 
tion until  death  or  re-marriage.  In  addition  funeral  benefits 
and  medical  care  are  usually  provided  for. 

The  system  is  placed  under  the  control  of  a  state  com- 
mission which  has  power  to  settle  disputes.  Resort  to  the 
courts,  except  in  rare  cases,  is  avoided.  The  compensation 
system  can  be  administered  without  great  expense;  and 
the  amount  of  the  payment  is  definite.  Payments  begin 
soon  after  the  accident  and  continue  regularly.  The  em- 
ployer usually  insures  against  accidents  in  a  mutual  or  other 
insurance  company  or  through  the  state  insurance  depart- 
ment. The  premiums  are  paid  to  the  insurance  company; 
the  compensation  is  paid  by  the  insurance  company  to  the 
injured  worker  or  to  his  family  as  required  by  law.  As  a 
rule  farm  laborers,  domestic  servants,  and  casual  laborers 
are  exempted  from  the  provisions  of  the  compensation  laws. 

Health  Insurance.  The  sickness  of  wage  earners  is  a 
more  important  cause  of  interrupted  wages  than  accidents. 
Practically  all  the  leading  industrial  nations  of  Europe  have 
adopted  some  form  of  health  insurance;  but  in  the  United 
States  (1919)  health  insurance  has  not  been  adopted  by  any 


INSURANCE  169 

state.  The  American  Association  for  Labor  Legislation, 
which  was  instrumental  in  pushing  the  campaign  for  work- 
ingmen's  compensation,  has  for  several  years  carried  on  a 
campaign  of  education  in  regard  to  the  merits  of  health  in- 
surance. A  standard  health  insurance  bill  has  been  drawn 
up  by  this  Association  after  much  study  and  criticism.  It 
seems  probable  that  the  chief  features  of  this  measure  will 
be  included  in  the  state  laws  if  such  measures  are  passed 
in  the  near  future. 

This  tentative  measure  provides  for  compulsory  insur- 
ance against  the  sickness  of  all  wageworkers  whose  earnings 
do  not  exceed  one  hundred  dollars  per  month,  except  casual 
and  home  workers.  The  benefits,  in  case  of  the  illness  of 
the  wage  earner,  are  to  consist  of  cash  benefits,  medical  and 
nursing  attendance,  medicines  and  surgical  supplies,  etc. 
It  is  provided  that  the  cash  benefit  shall  be  paid  beginning 
with  the  fourth  day  of  illness  and  continue  during  disability 
but  not  more  than  thirteen  weeks  in  one  case  of  sickness 
nor  more  than  twenty-six  weeks  in  any  consecutive  twelve 
months.  The  amount  paid  shall  be  not  more  than  sixty-six 
and  two-thirds  per  cent  of  the  weekly  wage  of  the  insured 
worker. 

The  premiums  for  health  insurance  should  be  paid  by 
contributions  from  the  employer,  the  employee  insured,  and 
the  state  government.  The  act  drawn  up  by  the  American 
Association  for  Labor  Legislation  provides  that  forty  per 
cent  of  the  total  premium  be  paid  by  the  employer,  forty 
per  cent  be  deducted  from  the  wages  of  the  insured,  and  the 
remaining  twenty  per  cent  paid  out  of  the  state  treasury. 
The  insurance  may  be  carried  by  mutual  or  other  insurance 
companies  or  by  the  state  insurance  department.  The 
system  should  be  controlled  by  a  state  commission. 


170  ELEMENTARY   ECONOMICS 

The  total  expense  of  health  insurance  in  all  the  states  of 
the  United  States  would  be  perhaps  a  billion  dollars  per 
year.  Such  a  large  expenditure  can  only  be  justified  if  it 
will  reduce  the  amount  of  sickness  and  obviate  the  necessity 
for  many  famiHes  of  workingmen  to  depend  upon  public 
or  private  charity  in  times  of  sickness.  The  student  of 
social  insurance  must  not  overlook  the  incentives  to 
fraud  and  malingering  in  order  to  receive  the  sickness 
benefits. 

Old- Age  Insurance.  Social  insurance  for  old  age  is  in 
two  forms:  compulsory  insurance  and  a  pension  system. 
Germany  and  France  use  the  former  system;  England, 
Belgium,  Denmark,  New  South  Wales,  Victoria,  and  New 
Zealand  adhere  to  the  pension  system.  In  Germany,  the 
imperial  government  contributed  approximately  twelve 
dollars  per  year  toward  each  pension  for  old  age  or  in- 
validity. The  remainder  of  the  expense  is  divided  equally 
between  employer  and  employee.  Under  the  English  law 
every  worthy  wage  earner  in  poverty  who  has  reached  the 
age  of  seventy  years  is  granted  a  small  yearly  pension.  In 
Denmark,  the  age  limit  is  sixty  years.  A  large  percentage 
of  American  wageworkers  are  in  poverty  and  dependence 
after  their  sixty-fifth  year ;  one  authority  in  1912  estimated 
the  number  to  be  one  and  one-fourth  million.  A  pension 
which  would  give  to  each  member  of  this  group  a  meager 
income  would  relieve  and  prevent  much  suffering  and 
humiliation;  but  the  expense  of  the  system  would  be  con- 
siderable. An  old-age  insurance  system  with  governmental 
aid  seems  preferable.  More  liberal  amounts  could  be  al- 
lowed as  pensions,  and  thrift  would  be  given  greater  en- 
couragement than  under  a  pension  system  like  that  of 
England. 


INSURANCE  171 

Unemployment  Insurance.  One  of  the  most  serious  mis- 
fortunes which  the  wageworkers  confront  is  involuntary 
unemployment.  Statistics  show  that  even  in  times  of 
prosperity  many  workers  are  involuntarily  idle;  and  in 
periods  of  depression  the  percentage  often  becomes  alarm- 
ingly great.  Unemployment  insurance  is  the  most  difficult 
form  of  social  insurance  to  administer  properly.  It  is  easy, 
and  to  many  alluring,  to  pretend  to  be  unable  to  obtain  a 
job.  Obviously,  any  plan  of  unemployment  insurance  must 
be  supplemented  by  excellent  means  of  applying  work  tests 
to  the  person  who  asks  for  unemployment  benefits.  Be- 
fore unemployment  insurance  can  be  adopted  on  a  large 
scale  a  general  and  well-organized  system  of  employment 
bureaus  is  undoubtedly  essential.  Such  a  system  appears 
to  be  in  the  making  in  the  United  States. 

Certain  cities  of  continental  Europe,  notably  Ghent  in 
Belgium,  have  instituted  optional  systems  of  unemploy- 
ment insurance  for  a  limited  number  of  workers.  Great 
Britain  is  the  only  nation  to  establish  a  nation-wide  com- 
pulsory system.  This  act  was  passed  in  1911  and  covers 
workers  in  seven  different  industries.  The  first  step  taken 
was  the  organization  of  an  extensive  system  of  employ- 
ment bureaus  covering  all  parts  of  the  Kingdom.  Equal 
contributions  are  made  by  employer  and  employee,  and  the 
government  adds  a  subsidy.  Insurance  benefits  may  be 
paid  for  not  more  than  fifteen  weeks  in  any  year.  To  re- 
ceive unemployment  benefits,  the  worker  must  be  "  em- 
ployable "  and  he  must  be  required  to  present  himself  at 
an  employment  bureau  each  day  while  receiving  benefits; 
and  he  must  of  course  accept  a  suitable  job  if  offered  to  him. 
As  incentives  for  the  reduction  of  unemployment  a  refund 
of  a  portion  of  his  contribution  is  made  to  an  insured  worker 


172  ELEMENTARY   ECONOMICS 

who  has  had  steady  employment  for  a  certain  period,  and 
a  refund  is  also  given  an  employer  who  has  kept  his  em- 
ployees continuously  on  the  pay-roll  for  a  year.  As  this 
initial  attempt  on  a  large  scale  to  reduce  the  evil  effects 
of  unemployment  was  in  effect  only  three  years  before  the 
war  opened,  it  is  not  possible  to  judge  of  the  success  of  the 
system  under  normal  conditions. 

Provisions  for  Enlisted  Man  and  Their  Families.  Soon 
after  the  United  States  entered  the  war  a  fairly  compre- 
hensive compensation  and  insurance  measure  was  passed 
by  Congress.  This  act  was  drawn  after  a  careful  investi- 
gation and  displaces  the  old,  unsystematic,  and  unscientific 
pension  scheme  of  preceding  years.  War  is  recognized  as 
an  extra-hazardous  industry,  and  as  one  which  profoundly 
disturbs  ordinary  family  relations  and  cuts  off  in  the  ma- 
jority of  cases  the  ordinary  income  of  the  family  of  the 
soldier  or  sailor.  The  law  provides  a  governmental  system 
which  assures  the  family  of  the  enlisted  man  a  modest  in- 
come while  he  is  in  the  service  of  the  nation  or  in  case  of 
his  injury  or  death.  The  principles  of  social  insurance  are 
applied  to  the  soldier  and  sailor  by  the  federal  government. 

The  chief  features  of  the  act  may  be  presented  under 
four  headings:  (a)  Allotments  and  Allowances.  All  en- 
listed men  are  required  to  make  allotments  of  pay  for  the 
benefit  of  wife  and  children.  The  monthly  compulsory 
allotment  shall  not  be  more  than  half  pay  nor  less  than  fif- 
teen dollars.  The  government  makes  an  allowance  of  fifteen 
dollars  per  month  if  there  be  a  wife  but  no  children;  of 
twenty-five  dollars  if  there  be  a  wife  and  one  child ;  of 
thirty-two  dollars  and  fifty  cents  if  there  be  a  wife  and  two 
children.  For  each  additional  child  an  additional  five 
dollars  per  month  is  allowed.     If  the  family  of  an  enlisted 


INSURANCE  173 

man  consists  of  a  wife  and  two  children,  the  compulsory 
allotment  and  the  governmental  allowance  gives  them  a 
monthly  income  of  $47.50.  Provisions  are  also  made  for 
children  in  case  the  wife  is  dead  and  for  other  dependents.^ 
(6)  Compensation  in  Case  of  Death  or  Disability.  In  case 
of  the  death  of  an  enlisted  man,  the  government  allows 
twenty-five  dollars  monthly  compensation  to  the  widow 
and  additional  allowances  for  minor  children.  The  com- 
pensation of  the  widow  continues  until  death  or  re-marriage, 
to  the  children  until  eighteen  years  of  age  or  until  married. 
Provisions  are  also  made  in  case  of  total  or  partial  disability 
of  the  soldier  or  sailor,  (c)  Voluntary  Insurance.  Life 
insurance  companies  demand  extra  war  premiums  of  officers 
and  enlisted  men.  The  law,  therefore,  provides  for  volun- 
tary governmental  insurance  at  low  rates  against  death  or 
total  disability.  The  amount  of  insurance  may  not  be  less 
than  $1000  nor  more  than  $10,000.  (d)  Vocational  Train- 
ing for  Injured  Men.  The  government  is  also  to  make 
provision  for  the  training  of  disabled  men  for  suitable  trades 
or  occupations. 

TOPICS   FOR   DISCUSSION 

1.  What  is  the  fire  insurance  rate  in  your  town  or  city?  Is  it 
higher  or  lower  than  in  other  cities  of  approximately  the  same 
population  ? 

2.  Has  your  state  a  workingmen's  compensation  law?  What 
are  its  chief  features  ? 

3.  Has  there  been  any  agitation  for  health  insurance  in  your 
state  ? 

^  Officers  are  not  included  under  the  provisions  of  this  portion  of  the  act. 


CHAPTER  XX 
MARKETING 

Inefficient  Methods.  The  growth  of  cities,  more  in- 
tricate division  of  labor,  and  the  increasing  complexity  of 
modern  industry  have  stretched  the  distance  from  the 
producer  to  the  consumer  and  have  made  possible  the  inter- 
vention of  a  chain  of  middlemen.  And  there  are  hundreds 
of  thousands  of  workers  in  unnecessary  occupations.  Each 
one  of  these  middlemen  and  unnecessary  workers  demands 
a  profit ;  each  is  in  business  to  make  a  living.  Much  more 
attention  has  been  paid  to  the  processes  of  primary  pro- 
duction than  to  the  process  of  marketing  products.  Es- 
pecially in  the  marketing  of  food  products,  slipshod  methods 
have  reigned  supreme.  Food  scarcity  in  certain  localities 
is  frequently  accompanied  by  a  food  surplus  in  other  dis- 
tricts. In  recent  years,  more  and  more  attention  is  being 
devoted  to  advertising  and  the  art  of  salesmanship,  but  the 
prime  object  in  view  is  the  sale  of  the  commodity,  not  the 
reduction  of  the  expenses  of  getting  the  product  from 
the  producer  to  the  ultimate  consumer. 

A  study  of  the  marketing  of  farm  products  made  by  the 
students  of  Harvard  University  in  1911  yielded  results 
which  are  worthy  of  notice.  Apples  produced  in  Marlboro, 
Massachusetts,  were  sold  by  the  producer  for  $2.25  per 
barrel ;  the  consumer  in  Boston  paid  $7.50  per  barrel.  The 
difference  between  these  two  sums  was  divided  as  follows: 
picking,  $0.25 ;  barrel,  $0.25 ;  commission,  $0.25 ;  sorting, 
$0.15;  labeHng,  carting,  etc.,  $0.10;  storage,  $0.50;  whole- 

174 


MARKETING  175 

saler,  $2.00;  retailer,  $1.50;  freight,  $0.25.  Milk  produced 
in  Montgomery  County,  Pennsylvania,  and  sold  for  3| 
cents  per  quart  was  retailed  in  Philadelphia  for  8  cents.  Of 
the  difference,  the  retailer  received  4  cents  and  the  trans- 
portation company  absorbed  |  of  one  cent  for  freight.  An 
investigation  of  the  citrus  fruit  industry  in  California  re- 
vealed the  fact  that  one-third  of  the  consumer's  dollar  goes 
to  the  retailer  of  the  fruit,  eight  per  cent  to  the  jobber,  and 
over  twenty  per  cent  for  transportation  and  refrigeration. 

These  three,  and  a  considerable  number  of  other  examples, 
show  clearly  that  marketing  costs  of  farm  products  amount 
to  a  large  fraction  of  the  total  paid  by  the  consumer.  A 
newspaper  account  of  the  marketing  of  eggs  in  the  vicinity 
of  the  city  of  Chicago  in  1917  reveals  a  considerable  string 
of  middlemen,  each,  of  course,  insistent  upon  his  profit. 
The  eggs  are  usually  sold  by  farmers  to  a  collecting  agent 
who  drives  about  the  country.  The  agent  sells  to  a  country 
shipper  located  in  some  town,  who  in  turn  sends  the  eggs 
to  a  large  produce  shipping  company  in  the  nearest  city. 
The  latter  ships  to  a  broker  in  Chicago,  who  may  put  them 
in  cold  storage.  Later,  the  eggs  are  sold  to  a  jobber ;  the 
jobber  sells  to  the  retailer,  and  the  latter  to  the  consumer. 
Six  profits  must  be  paid ;  breakage  and  decay,  transpor- 
tation and  cold  storage  also  take  toll. 

A  food  survey  of  Altoona,  Pennsylvania,  in  1915,  showed 
that  two-fifths  of  the  food  bill  of  that  city  of  approximately 
60,000  inhabitants  was  spent  for  transportation  and  re- 
transportation,  handling  and  rehandling,  waste,  jobbers' 
profits,  and  the  like.  Four-fifths  of  the  city's  perishable 
food  came  by  rail,  often  long  distances.  As  an  inevitable 
consequence,  the  consumers  were  obliged  to  consume  many 
"  stale  and  therefore  tasteless,  unappetizing,  and  inedible 


176  ELEMENTARY   ECONOMICS 

vegetables."  This  investigation  also  uncovered  the  fol- 
lowing episode  in  the  history  of  marketing  in  Altoona.  A 
farmer  hauled  a  barrel  of  apples  to  the  station  and  shipped 
it  by  rail  to  Altoona.  There,  the  barrel  was  placed  on  a 
dray  and  taken  to  a  commission  merchant.  The  latter 
purchased  and  forwarded  it  to  Pittsburgh,  —  again  drayage 
and  shipment.  In  Pittsburgh,  the  barrel  was  again  hauled 
to  the  store  of  a  commission  merchant,  sold,  and  taken  to 
the  station  in  Pittsburgh.  The  barrel  was  again  placed  in 
a  freight  car  and  carried  back  to  Altoona,  hauled  to  the 
store  of  another  commission  merchant,  sold  and  hauled  to  a 
retailer.  The  latter  opened  the  barrel  and  sold  the  apples 
to  his  customers.  ''  Four  sales,  six  cartings,  three  railway 
journeys,  all  on  one  barrel  of  apples,  —  not  very  good  apples 
either."  This  has  aptly  been  called  the  ^'  mob  "  method  of 
marketing.  By  means  of  a  scientific  organization  of  market- 
ing, much  of  Altoona's  perishable  food  could  doubtless  be 
produced  near  the  city  and  placed  in  the  hands  of  consumers 
with  little  waste  and  without  unnecessary  transportation. 
Altoona's  problem  is  that  of  the  typical  American  city. 

In  1911  it  was  estimated  that  there  were  350,000  grocers 
in  the  United  States;  that  is,  about  one  grocer  for  every 
260  persons  or  one  for  every  52  families.  An  investigation 
of  the  delivery  of  milk  in  a  section  of  Rochester,  New  York, 
made  in  1917,  disclosed  some  interesting  facts.  In  a  small 
neighborhood,  57  dealers  delivered  milk  to  363  homes, 
traveling  an  aggregate  of  30  miles.  The  service  could  have 
been  rendered  by  one  distributor  traveling  two  miles.  A 
similar  method  of  delivery  obtained  in  other  sections  of  that 
city,  —  and  in  many  other  cities  in  the  United  States.  In 
New  York  City  (1917)  there  were  approximately  47,500 
retail  stores  and  markets,  and  one  thousand  small  jobbers 


MARKETING  177 

selling  to  the  stores  and  restaurants.  Farther  from  the 
consumers  are  wholesale  markets  and  commission  mer- 
chants. And  the  latter  buy  of  wholesalers  who  in  turn  buy 
of  the  producers  and  ship  to  New  York  City.  Here  is  dis- 
closed a  great  and  costly  chain  of  middlemen  whose  business 
it  is  to  provide  foodstuffs  for  the  five  or  six  millions  of  people 
living  in  the  great  metropolis.  Unnecessary  marketing 
expense  tends  to  increase  the  price  paid  by  the  consumer  and 
to  lower  the  price  received  by  the  primary  producer.  The 
fundamental  problem  is :  Can  the  chain  be  shortened  and 
the  expense  of  marketing  and  transporting  reduced  ? 

War  conditions  forced  the  American  people  to  give  more 
careful  consideration  to  the  important  matter  of  food  pro- 
duction and  distribution.  The  war  directed  the  attention 
to  all  forms  of  waste ;  it  made  "  us  all  think  food  and  talk 
food."  As  a  consequence,  more  and  more  attention  is  being 
paid  to  marketing,  and  now  with  a  view  to  reducing  the 
expenses  of  marketing.  It  must  not  be  forgotten,  however, 
tRat  the  use  of  the  telephone,  advertising,  the  employment 
of  the  carton,  and  the  greater  emphasis  upon  cleanliness 
are  all  expenses  which  add  to  the  total  cost  of  marketing 
products ;  and  the  tendency  toward  specialization,  the  growth 
of  cities,  and  the  consequent  separation  of  the  consumer  and 
the  producer,  all  make  inevitable  the  development  of  a 
multitude  of  middlemen. 

The  quite  general  use  of  the  one-price  system  has  also 
changed  the  mechanism  of  bargaining.  The  old,  time- 
wasting  methods  of  bluff  and  higgling  are  no  longer  used. 
The  merchant  fixes  one  price  for  all ;  the  would-be  purchaser 
must  pay  that  price  or  go  without  the  article  unless,  of  course, 
some  competitor  will  sell  at  a  lower  price.  The  original 
package  and  the  money-back-if-dissatisfied  method  of  sell- 


178  ELEMENTARY   ECONOMICS 

ing  goods  tend  to  improve  business  morals.  The  responsi- 
bility for  an  imperfect  or  adulterated  product  can  be  easily 
traced.  Deceit,  adulteration  of  goods,  and  other  dishonest 
business  methods  must  now  be  discarded  or  be  very  care- 
fully covered  up ;  it  is  no  longer  profitable  to  be  crudely 
dishonest. 

Proposals  for  Betterment.  Among  the  schemes  utilized 
to  bring  the  consumer  and  the  producer  closer  to  each  other 
by  eliminating  certain  links  in  the  usual  long  chain  between 
them,  are  the  parcel  post,  municipal  markets,  and  coopera- 
tive sales  agencies.  Many  commercial  houses  have  used 
the  parcel  post  successfully;  but  the  farmers  have  not  as 
yet  made  extensive  use  of  the  parcel  post  in  marketing  their 
produce.  Public  markets  are  important  factors  in  market- 
ing farm  produce  in  many  eastern  and  some  western  cities. 
Cooperative  methods  have  been  successfully  used  in  market- 
ing grain,  fruit,  vegetables,  and  live  stock.  Cooperative 
buying  has  also  been  employed  successfully  by  farmers  and 
others.  "  A  long  line  of  commission  men,  produce  merchants, 
jobbers,  hucksters,  retailers,  and  what  not  simply  passing 
goods  from  hand  to  hand  like  a  bucket  brigade  at  a  fire,  is 
not  only  inefficient  and  wasteful,  but  very  costly.  In  these 
days  a  hydrant  and  a  line  of  hose  are  wanted."  Public 
markets,  the  parcel  post,  and  cooperative  marketing  are 
attempts  at  furnishing  the  hydrant  and  hose. 

Advertising.  Advertising  draws  attention  to  a  new  article 
and  stimulates  new  wants,  or  it  boosts  the  sale  of  one  variety 
of  article  with  a  consequent  reduction  in  the  sales  of  another 
variety  of  the  same  article.  Advertising  is  a  marketing 
tool,  and  the  expense  of  its  use  must  ultimately  be  borne 
by  the  consumer  or  by  the  primary  producer  of  the  ad- 
vertised article.     Advertising  is  primarily  a  guide  to  the 


MARKETING  179 

consumer ;  but  much  of  the  advertising  in  the  daily  papers 
and  the  magazines  is  of  the  purely  competitive  type  paid 
for  by  rival  sellers  of  similar  commodities.  Consequently, 
a  considerable  percentage  of  commercial  advertising  is  of 
the  socially  unnecessary  and  wasteful  kind.  Soon  after  the 
entrance  of  the  United  States  into  the  war,  the  government 
began  furnishing  much  information  as  to  the  desirability  of 
certain  goods,  notably  of  food  products.  Such  action  on  the 
part  of  public  authorities  reduces  the  social  necessity  for 
private  advertising. 

In  recent  years  the  art  of  advertising  has  been  highly 
developed.  Skillful  advertisers  and  salesmen  look  to  the 
weaknesses,  the  vanity,  and  the  prejudices  of  possible  pur- 
chasers. Salesmanship  is  becoming  an  art;  and  universi- 
ties, colleges,  night  schools,  and  correspondence  schools  are 
offering  courses  of  instruction  in  salesmanship.  The  con- 
sumers, in  self-defense,  need  instruction  in  methods  of  re- 
sisting the  skillfully  prepared  advertisement  and  the  shrewd 
salesman. 

TOPICS   FOR   DISCUSSION 

1.  How  many  grocery  stores  are  there  in  your  city  ?  How  many 
families  per  store  ? 

2.  How  many  meat  markets?  How  many  families  per  meat 
market  ? 

3.  How  are  groceries  delivered  in  your  city  ? 

4.  Is  there  a  public  market?  If  so,  is  it  well  located?  Do 
many  families  purchase  at  the  market? 

5.  Is  there  a  cooperative  store? 


CHAPTER  XXI 
PUBLIC   EXPENDITURES   AND   PUBLIC   DEBTS 

The  Functions  of  Government.  The  government  of  a 
nation,  like  all  other  social  institutions,  changes  as  the  years 
go  by.  The  functions  of  the  American  government  have 
changed  as  constitutions  and  laws  have  been  modified,  as 
judges  have  handed  down  new  decisions  as  to  the  significance 
of  existing  laws  and  constitutions,  and  as  new  administrative 
methods  come  into  vogue.  A  war  inevitably  brings  with  it 
marked  changes  in  the  governments  of  the  nations  involved. 
During  the  Middle  Ages  and  until  the  latter  part  of  the 
eighteenth  century,  the  English  government  endeavored 
to  restrain  business  activities;  it  granted  monopoly  privi- 
leges, attempted  to  fix  wages  and  prices,  and  tried  to  deter- 
mine the  quality  of  goods  bought  and  sold  on  the  market. 
The  American  colonists  resented  the  interference  of  the 
English  government  in  colonial  business  affairs.  Then 
followed  an  epoch  in  which  the  pendulum  swung  to  the  other 
extreme ;  and  a  very  different  theory  of  government  was 
accepted.  The  function  of  government  was  conceived  to 
be  restricted  to  very  narrow  limits.  The  government  was 
organized  merely  to  protect  persons  and  property  from 
foreign  enemies  or  internal  disorders ;  it  should  not  control 
or  regulate  in  any  way  ordinary  business  affairs. 

The  American  government  was  founded  and  our  federal 
Constitution  formulated  when  the  non-interference  theory 
of  governmental  functions  was  generally  accepted  by  Eng- 
lish-speaking people.  It  became  the  underlying  principle 
of  our  constitutional  and  legal  system.    This  theory  caused 

180 


PUBLIC   EXPENDITURES   AND   PUBLIC   DEBTS     181 

no  considerable  degree  of  injustice  so  long  as  industries 
were  small-scale,  and  the  United  States  was  still  a  nation 
of  pioneers.  But  as  business  became  large-scale  and  econcmic 
class  demarcations  became  clearer,  some  governmental  regu- 
lations to  curb  special  privilege  and  monopoly  were  urgently 
demanded.  In  recent  decades,  the  functions  of  government 
have  been  rapidly  increasing ;  and  as  a  consequence  the  expend- 
itures of  government  have  risen  to  higher  and  higher  levels. 
Expenditures  of  Different  Governmental  Units.  In  this 
country,  several  different  branches  of  government  are 
authorized  to  spend  money.  The  federal,  state,  municipal, 
and  other  local  and  school  district  authorities  may  provide 
for  expenditures.  In  1911,  the  expenditures  of  the  federal 
government  were  somewhat  more  than  $10  per  capita;  in 
the  same  year  the  State  of  Minnesota  expended  for  state 
purposes  nearly  $8  per  capita.  In  1910,  the  per  capita  ex- 
penditures of  the  State  of  New  York  were  also  nearly  $8 ; 
but  the  City  of  New  York  expended  almost  $33  for  each 
man,  woman,  and  child  living  in  the  city.  The  amount 
expended  per  capita  by  our  states  and  cities  varies  greatly ; 
it  has  been  estimated  that  before  the  opening  of  thf  Great 
War  in  1914,  from  $150  to  $175  were  expended  by  the 
various  governmental  units  for  each  and  every  family  re- 
siding in  the  United  States.  This  amount  was  a  consider- 
able fraction  of  the  average  family  income,  —  perhaps  one- 
tenth  to  one-eighth.  According  to  estimates  made  by 
Professor  King  of  the  University  of  Wisconsin,  the  per  capita 
cost  of  government  in  the  United  States  was  multiplied 
nearly  seven  times  in  the  sixty  years  from  1850  to  1910. 
During  the  same  time  the  average  income  of  each  individual 
was  only  quadrupled.  The  expenditures  for  governmental 
purposes  are  increasing  much  faster  than  the  average  income 


182  ELEMENTARY   ECONOMICS 

of  the  American  citizen;  a  larger  and  larger  portion  of  our 
total  income  is  expended  by  the  government  and  a  decreasing 
fraction  by  individuals. 

The  expenditures  of  American  cities  have  been  increasing 
with  great,  almost  alarming,  rapidity.  The  reason  is  not 
difficult  to  ascertain.  The  paving  of  streets,  increased  fire 
and  police  protection,  better  schools,  measures  for  protection 
against  disease,  recreation  facilities,  and  a  multitude  of 
other  items  go  to  swell  the  total.  For  the  last  decade  and 
a  half  the  expenditures  of  the  state  governments,  which 
had  not  been  growing  rapidly  before  that  time,  have  also 
been  increasing  at  a  rapid  pace.  State  aid  in  building  good 
roads,  the  extension  of  government  by  commissions  and 
boards,  the  increasing  aid  to  education,  and  larger  expendi- 
tures for  charitable  and  penal  institutions  and  institutions 
for  defectives,  are  in  no  small  degree  responsible  for  the  in- 
crease in  state  expenditures.  The  expenditures  of  the 
federal  government  have  also  increased  with  rapid  strides. 
In  1913,  the  federal  government  spent  about  one  billion 
dollars ;  this  sum  is  more  than  the  estimated  expenditures  of 
all  governmental  units  —  national,  state,  local,  and  school  — 
in  1890.  With  the  opening  of  the  war  in  1914  and  the  speed- 
ing up  of  our  preparations  for  war,  the  expenditures  of  the 
federal  government  became  still  larger.  The  federal  ex- 
penditures for  the  first  fiscal  year  after  the  entrance  of  the 
United  States  into  the  struggle  (July  1,  1917,  to  June  30, 
1918),  amounted  to  over  twelve  billions  of  dollars,  of  which 
approximately  four  and  three-fourths  billions  were  loaned 
to  the  Allies.  The  actual  expenditures  of  our  federal  gov- 
ernment were,  therefore,  approximately  seven  and  one-half 
billions  of  dollars.  From  January  31  to  May  15,  1918,  the 
average  daily  expenditures  were  about  $39,000,000. 


PUBLIC   EXPENDITURES   AND   PUBLIC   DEBTS     183 

The  average  daily  expenditure  of  the  British  Government 
for  the  last  fiscal  year  preceding  the  opening  of  the  war  with 
Germany  was  two  and  three-fourths  millions  of  dollars; 
before  the  second  year  of  the  war  was  over,  the  daily  average 
expenditure  was  twenty-five  millions  of  dollars.  And 
later  the  daily  expenditures  reached  much  higher  levels. 

Analysis  of  Expenditures.  It  is  interesting  and  instructive 
to  examine  the  larger  items  of  expenditure  of  a  city,  a  state, 
and  the  federal  government.  New  York,  the  largest  Ameri- 
can city,  spends  nearly  two  hundred  millions  of  dollars 
annually.  In  1913,  the  appropriations  made  were  in  round 
numbers  $190,400,000;  the  actual  expenditures  may  have 
differed  slightly  from  this  total.  In  the  table  following, 
the  total  appropriations  are  divided  into  ten  divisions;  and 
the  percentage  of  the  whole  assigned  to  each  division  is 
given. 

Per  Cent 

Administration  and  Legislation 1.92 

Education 19.80 

Protection  of  Life  and  Property 16.37 

Streets,  Bridges,  Docks,  and  Ferries 4.35 

Recreation,  Science,  and  Art 1.86 

Debt  Service  (Redemption  and  Interest) 28.87 

Judicial  Service 4.65 

Health  and  Sanitation 9.44 

Correctional  and  Charitable  Purposes 5.27 

Miscellaneous  (Rents,  Elections,  Public  Buildings,  Print- 
ing, Pensions) 7.47 

An  analysis  by  an  accountant,  Harvey  S.  Chase,  of  the 
"  estimates ''  of  the  expenditures  of  the  federal  government 
for  the  fiscal  year  ending  June  30,  1915,  is  perhaps  the  best 
for  our  present  purpose.  Mr.  Chase  divides  the  expendi- 
tures into  five  classes :  (1)  War  Functions,  —  army,  navy, 
interest  on  war  debts,  war  pensions,  etc. ;    (2)  Peace  Func- 


184  ELEMENTARY   ECONOMICS 

tions,  —  the  promotion  of  agriculture,  public  health,  and 
education,  the  regulation  of  the  currency  and  banking, 
administrative  costs  of  the  Departments  of  State,  Interior, 
Agriculture,  Commerce,  and  Labor,  care  of  Indians,  and  a 
large  group  of  other  items ;  (3)  Postal  Service ;  (4)  General 
Governmental  Functions,  —  legislative,  executive,  judicial, 
etc. ;  (5)  Local  Governmental  Functions,  —  territorial  gov- 
ernments, Philippine  Islands,  District  of  Columbia,  etc. 
The  percentage  of  the  total  expenditures  assigned  to  each  of 
these  five  groups  is  approximately  as  follows :  — 

Per  Cent 

War  Functions 44.2 

Peace  Functions 18.1 

Postal  Service 29.5 

General  Governmental  Functions 6.7 

Local  Governmental  Functions 1.5 

100.00 

Preparedness  and  actual  participation  in  war  have  greatly 
enlarged  the  fraction  assigned  to  war  functions,  and,  of 
course,  greatly  increased  the  total. 

The  Minnesota  Tax  Commission  made  a  careful  analysis 
of  the  expenditures  of  that  state  for  the  year  191L  The 
table  on  the  following  page  presents  the  results  of  that 
analysis.  Good  roads  may  in  the  future  be  expected  to 
absorb  an  appreciable  percentage  of  the  total  expenditures 
of  our  states. 

Since  our  governmental  expenditures  are  so  large  and 
absorb  a  considerable  fraction  of  the  total  income  of  the 
men  and  women  of  the  nation,  it  is  highly  important  that 
waste,  inefficiency,  and  graft  be  reduced  to  a  minimum. 
Each  and  every  citizen  is  vitally  interested  in  the  matter 
of  efficient  governmental  service.  The  tax  gatherers  reach 
down  into  each  and  every  pocketbook. 


PUBLIC   EXPENDITURES  AND   PUBLIC   DEBTS     185 

Per  Cent 

Administration  (all  departments) 13.47 

Courts 2.44 

Legislature 2.81 

Education 47.29 

Care  of  the  Insane 9.31 

Correctional  Institutions 6.06 

Other  State  Institutions 1.77 

Militia 1.03 

Debt  and  Interest 9.14 

Miscellaneous 6.68 

100.00 

Public  Debts.  Public  debts  are  incurred  chiefly  because 
of  extraordinary  expenditures  on  account  of  war,  or  for  the 
building  of  public  works,  such  as  canals,  municipal  plants, 
improved  roads,  and  public  buildings.  From  time  to  time, 
small  debts  are  incurred  to  make  up  deficits  in  the  public 
revenues.  In  the  United  States,  the  national  debt  is  very 
largely  the  result  of  war  expenditures;  but  the  state  and 
local  debts  are  due  mainly  to  expenditures  for  public  works. 
In  recent  years  the  debts  of  the  local  governmental  units, 
particularly  of  municipalities,  have  increased  very  rapidly. 
In  1870  the  total  debt  of  our  local  governmental  units  was 
$516,000,000;  in  1902,  $1,630,000,000;  and  in  1913, 
$3,476,000,000.  The  per  capita  debt  of  these  minor  di- 
visions increased  from  $20.74  in  1902  to  $38.81  in  1913. 
The  debt  of  New  York  City  in  1912  was  as  large  as  our 
national  debt  at  that  time.  The  debts  of  the  states  are 
comparatively  small,  but  have  been  increasing  since  1890. 

The  debt  of  the  federal  government  was  large  after  the 
close  of  the  Civil  War.  In  1870,  it  totaled  $2,331,000,000; 
but  by  1890  it  was  reduced  to  $852,000,000.  The  Spanish- 
American  War,  the  increase  in  our  navy,  and  the  building  of 
the  Panama  Canal,  caused  a  comparatively  slight  increase. 


186  ELEMENTARY   ECONOMICS 

This  increase  was,  however,  less  than  the  increase  in  popu- 
lation. The  national  debt  per  capita  was  $60.46  in  1870 
and  $10.59  in  1913. 

The  opening  of  the  Great  War  in  1914  has  caused  enormous 
increases  in  the  national  debt  of  all  belligerent  countries. 
In  the  first  year  and  a  half  of  war,  England's  debt  rose  from 
approximately  $3,500,000,000  to  $11,155,000,000.  By  the 
end  of  1916,  it  was  estimated  that  the  national  debt  of  the 
five  chief  belligerents  had  been  increased  by  $49,455,000,000. 
The  national  debt  of  all  the  countries  of  the  world  was 
estimated  to  be  only  $36,548,000,000  in  1908.  The  debt 
of  the  federal  government  of  the  United  States  in  1913  was 
approximately  one  billion  of  dollars ;  but  the  total  amount 
borrowed  during  the  first  fiscal  year  of  war  was  about  eight 
billions  of  dollars,  of  which  a  little  more  than  one-half  was 
loaned  to  the  Allies. 

TOPICS   FOR   DISCUSSION 

1.  Get  a  statement  of  the  expenditures  and  receipts  of  your 
town,  county,  and  state.  Compare  them  with  the  figures  given  in 
this  chapter. 

2.  What  is  the  amount  of  the  debt  owed  by  your  city?  Your 
county  ?     Your  state  ? 

3.  What  was  the  amount  of  the  expenditures  of  the  federal 
government  for  the  last  fiscal  year  ? 

4.  What  is  the  amount  of  the  debt  of  the  federal  government? 


CHAPTER  XXII 
TAXATION 

Governmental  Income.  Having  considered  the  expendi- 
tures of  our  government,  it  is  now  necessary  to  study  the  other 
side  of  the  problem,  —  that  of  the  income  of  the  different 
governmental  units.  An  individual  attempts  to  square 
his  expenditures  with  his  income;  but,  as  a  rule,  public 
officials  decide  first  upon  the  expenditures  to  be  allowed 
in  a  given  year  and  then  proceed  to  put  into  effect  such  tax 
measures  as  will  yield  the  required  amount.  It  should 
also  be  noted  that,  except  as  the  government  carries  on 
business  enterprises,  the  income  of  the  public  treasury  is  a 
secondary  or  derivative  income;  the  public  purse  is  re- 
plenished by  taking  a  portion  of  the  income  of  the  nation's 
citizens.  There  is  no  "  magic  fund  "  out  of  which  a  gov- 
ernment may  pay  its  running  expenses. 

The  Budget  System.  In  England,  the  Chancellor  of  the 
Exchequer  presents  annually  to  Parliament  the  estimates 
of  the  needs  of  the  different  departments  of  the  govern- 
ment. He  also  presents  a  statement  of  the  changes  which 
should  be  made  in  the  taxing  system  to  meet  the  expendi- 
tures provided  for  in  the  estimates.  This  statement  of 
estimated  expenditure  and  receipts  is  called  the  budget. 
In  our  federal  government,  no  budget  system  worthy  of 
the  name  has  as  yet  been  developed.  Estimates  of  neces- 
sary expenditures  made  by  the  different  departments  of 
government  are  presented  to  Congress  by  the  Secretary  of 
the  Treasury.     Some  of  the  estimates  are  referred  to  one 

187 


188  ELEMENTARY   ECONOMICS 

committee  and  certain  ones  go  to  other  committees.  These 
committees  working  independently  report  in  due  time  to 
the  House.  The  matter  of  taxation  is  taken  up  by  another 
committee,  the  Ways  and  Means  Committee;  and  this 
also  reports  to  the  House.  A  similar  process  is  followed  in 
the  Senate.  There  is  little  systematic  and  scientific  study 
of  the  budget.  As  a  consequence,  the  expenditures  of  the 
federal  government  may  one  year  be  greater  than  the 
revenues,  and  another  year  be  much  less.  The  lack  of  unified 
consideration  of  income  and  outgo  is  not,  however,  wholly 
to  blame  for  the  situation.  Our  tariff  duties,  which  in  the 
past  have  been  the  source  of  about  one  half  of  the  federal 
revenue,  have  been  determined  primarily  for  the  purpose 
of  protecting  American  industries.  Revenue  has  been  an 
incidental  matter.  This  policy  has  greatly  increased  the 
difficulties  of  forecasting  the  probable  financial  fruitfulness 
of  a  tariff  measure. 

In  the  majority  of  the  state  legislatures  appropriations 
are  handled  in  much  the  same  manner  as  in  Congress.  In 
our  cities,  the  budget  making  is  carried  on  in  a  more  sys- 
tematic manner.  The  mayor  is  made  responsible  in  some 
cities  for  the  presentation  of  the  budget.  In  New  York 
City,  it  is  made  by  a  board  of  estimates  and  apportionment 
of  which  the  Mayor  is  a  member.  In  cities  under  the  city- 
manager  plan  of  government  it  is  the  duty  of  the  manager 
to  present  the  budget. 

Definition.  The  major  portion  of  the  income  of  our  local, 
state,  and  federal  governments  is  derived  from  taxation. 
A  tax  may  be  defined  as  a  compulsory  contribution  levied 
by  the  government  to  be  used  for  public  purposes  or  for 
common  benefits.  Some  other  less  important  sources  of 
governmental  income  are  special  assessments,  fees,  fines, 


TAXATION  189 

sale  of  public  land,  operation  of  public  industries,  loans, 
and  gifts. 

Tariffs.  Our  federal  government  derives  its  income 
chiefly  from  three  taxes :  customs  or  tariff  duties,  internal 
revenue  taxes  or  excises,  and  income  taxes.  A  tariff  duty 
is  levied  upon  goods  imported  into  this  country  from  some 
foreign  country.  The  duty  is  paid  to  governmental  officials 
at  the  port  of  entry.  Many  of  American  tariff  duties  are 
protective;  the  duties  are  levied  upon  the  importation  of 
certain  kinds  of  goods  which  are  produced  here  as  well  as 
imported.  Protective  duties  reduce  the  amount  of  the 
protected  article  imported,  and  give  American  manufacturers 
a  better  opportunity  to  produce  the  article  protected  in 
competition  with  foreign  manufacturers  A  tariff  for 
revenue  only  would  be  levied  only  upon  articles  not  pro- 
duced in  this  country.  Tea  is  not  produced  in  the  United 
States;  and  a  tariff  duty  placed  upon  tea  would  not  be 
protective.  On  the  other  hand,  a  tariff  on  steel  rails  would 
be  protective. 

A  tariff  duty  tends  to  raise  the  price  of  the  article  taxed. 
Consequently,  with  some  exceptions,  the  consumer  pays  a 
part  or  all  of  the  duty  by  paying  the  higher  price.  In  case 
of  a  protected  article,  the  consumer  as  a  rule  not  only  pays 
more  for  the  imported  article,  but  a  higher  price  may  be 
exacted  for  the  portion  of  the  supply  produced  in  this 
country.  In  other  words,  protected  manufacturers  are 
able  to  raise  the  prices  of  their  products  because  the  tariff 
makes  foreign  competition  somewhat  difficult.  Competi- 
tion between  American  manufacturers  may,  however,  force 
a  reduction  in  price,  —  unless  a  trust  or  combination  is 
formed.  A  very  high  protective  tariff  will  tend  to  stop  the 
importation  of  the  article  protected  and  to  stimulate  home 


190  ELEMENTARY   ECONOMICS 

manufacture  of  the  article.  Little  revenue  will,  therefore, 
be  obtained.  A  tariff  for  revenue  only  may  yield  large 
returns. 

Many  arguments  are  advanced  in  favor  of  and  against 
the  use  of  a  protective  tariff  system.  These  cannot  be  con- 
sidered in  detail  in  an  elementary  textbook  on  economics. 
It  may  be  pointed  out,  however,  that  protective  tariffs  tend 
to  diversify  industries  within  a  nation ;  and  in  time  of  war 
or  danger  of  war  it  is  highly  essential  that  a  nation  be  pre- 
pared to  produce  a  large  portion  of  its  war  supplies.  The 
student  should  also  notice  that  a  protective  tariff  may 
lower  the  productive  efficiency  of  a  nation  by  obliging  the 
workers  of  that  nation  to  produce  articles  which  can  more 
easily  be  produced  elsewhere.  If,  for  example,  the  United 
States  has  excellent  opportunities  to  produce  iron  and  steel 
products  and  possesses  fewer  advantages  in  the  production 
of  sugar,  it  would  be  desirable  from  an  economic  point 
of  view,  political,  war,  and  piivate  considerations  aside, 
to  exchange  iron  and  steel  products  of  home  manufac- 
ture for  sugar  produced  abroad.  The  people  of  the  United 
States,  and  of  the  other  nation  as  well,  might  have  more  of 
both  articles  than  they  would  have  if  a  protective  tariff  on 
sugar  made  importation  of  sugar  difficult,  and  caused  certain 
American  workingmen  to  be  used  in  producing  sugar  in- 
stead of  iron  and  steel  products. 

Internal  Revenue.  An  internal  revenue  tax  or  excise 
is  a  tax  levied  upon  the  production  of  certain  articles  or  upon 
the  performance  of  certain  functions.  For  over  a  half 
century  the  United  States  has  levied  an  internal  revenue 
tax  upon  the  manufacture  and  sale  of  liquors  and  tobacco. 
In  1916  and  1917  new  internal  revenue  taxes  were  also  levied 
upon  many  other  articles  and  services.     The  internal  revenue 


TAXATION  191 

tax  is  sometimes  used  to  stop  the  production  of  certain 
products  rather  than  to  provide  income  for  the  government. 
A  few  years  ago,  Congress  placed  an  excise  duty  upon  the 
production  of  matches  tipped  with  phosphorus.  This  tax 
was  sufficiently  high  to  prevent  further  manufacture  of 
this  kind  of  match.  It  was  cheaper  to  produce  matches 
tipped  with  other  and  non-poisonous  material  than  to  make 
the  phosphorus  match  and  pay  the  tax.  Congress  took 
this  action  because  the  manufacture  of  matches  tipped  with 
phosphorus  often  caused  a  very  loathsome  and  dangerous 
disease  among  the  workers  in  the  match  factories.  The 
tariff  can  be  used  to  stimulate  certain  kinds  of  manufacture ; 
and  the  internal  revenue  tax  can  be  utilized  to  stamp  out 
obnoxious  or  undesirable  methods  of  manufacture. 

The  Federal  Income  Tax.  The  income  tax  now  levied 
by  the  federal  governnient  is  a  complex  graduated  or  pro- 
gressive tax.  The  rate  is  higher  when  the  levy  is  made 
upon  large  incomes  than  when  it  falls  upon  small  incomes. 
In  1918  two  income  tax  laws  were  in  force,  —  the  ordinary 
tax  passed  in  1916  and  the  war  tax  imposed  in  1917.^  Both 
laws  provide  for  progressive  rates  and  for  the  exemption 
of  small  incomes.  The  head  of  a  family  pays  under  the 
war  tax  a  two  per  cent  tax  on  the  excess  in  his  income  over 
$2000  (plus  $200  for  each  dependent  child) ;  under  the 
ordinary  tax,  he  pays  two  per  cent  on  the  excess  over  $4000. 
These  are  called  the  normal  tax  rates.  In  the  case  of  other 
persons,  the  exemptions  are  $1000  and  $3000  respectively. 
Additional  taxes  or  sur-taxes  are  levied  on  incomes  above 
$5000.  For  example,  upon  an  income  between  $5000  and 
$7500  a  sur-tax  of  one  per  cent  is  levied  on  the  amount  above 
$5000;  on  incomes  between  $40,000  and  $60,000  a  sur-tax 

^  Modified  somewhat  in  1919. 


192  ELEMENTARY   ECONOMICS 

of  twelve  per  cent  is  levied;  and  on  incomes  in  excess  of 
$2,000,000  a  sur-tax  of  sixty-three  per  cent  is  levied  on  the 
amount  in  excess  of  $2,000,000.  An  income  of  $2,200,000 
would  pay  the  normal  taxes  on  the  entire  amount  minus  the 
exemptions  and  a  number  of  sur-taxes  ranging  from  one 
per  cent  on  $2500  to  sixty-three  per  cent  on  $200,000. 
Corporations  pay  a  tax  of  six  per  cent  upon  their  net  income ; 
and  dividends  received  by  individual  stockholders  are  not 
subject  to  the  normal  tax  under  the  income  tax  laws  out- 
lined above.  The  income  tax  is  theoretically  a  good  tax 
and  the  system  will  probably  be  retained  as  a  permanent 
part  of  the  federal  taxing  machinery. 

In  addition  to  tariff  duties,  internal  revenue  duties,  and 
income  taxes,  the  federal  government  levies  an  excess 
profits  tax  and  an  inheritance  tax  known  as  the  federal 
estates  tax.  The  excess  profits  tax  is  imposed  upon  profits 
in  excess  of  those  received  during  the  period  immediately 
preceding  the  war  or  in  excess  of  what  is  considered  to  be  a 
reasonable  rate  of  profits.  Corporations,  partnerships,  and 
individuals  are  subject  to  the  tax.  It  is  an  attempt  to  turn 
war  profits  into  the  federal  treasury.  The  federal  estates 
tax  is  levied  upon  the  transfer  of  estates  at  the  death  of  the 
owners.  This  tax  is  in  addition  to  any  inheritance  tax 
which  may  be  levied  by  a  state  government. 

State  and  Local  Taxation.  The  various  state  govern- 
ments derive  nearly  all  of  their  income  from  inheritance 
taxes,  corporation  taxes,  license  taxes,  and  the  general 
property  tax.  No  two  states  have  exactly  the  same  system. 
The  cities,  townships,  counties,  and  other  forms  of  local 
government  utilize  chiefly  the  general  property  tax.  Many 
improvements  in  cities  are  paid  for  by  special  assessments. 

The  inheritance  tax  is  used  by  about  three-fourths  of  the 


TAXATION  193 

American  states;  but  except  in  a  few  of  the  states,  the 
amount  received  from  this  tax  is  small.  The  usual  form  of 
the  state  inheritance  tax  provides  for  lower  rates  and  higher 
exemptions  for  direct  than  for  collateral  heirs,  and  the  rates 
are  progressive,  that  is,  the  larger  the  inheritance,  the 
higher  the  rate  of  taxation.  The  federal  estates  tax  is 
levied  upon  the  estate ;  the  state  inheritance  taxes  are  levied 
upon  the  inheritance.  A  state  tax  would  be  less  if  the  estate 
were  divided  among  ten  heirs  than  in  case  it  was  inherited 
by  one  heir.  The  inheritance  tax  is  a  good  tax ;  it  is  easily 
collected,  is  difficult  of  evasion,  and  does  not  impose  a  heavy 
burden  upon  the  taxpayer. 

The  Corporation  and  License  Taxes.  The  corporation 
tax  takes  many  forms.  It  is  levied  only  upon  businesses 
organized  as  corporations.  A  license  tax  is  a  payment  re- 
quired for  the  privilege  of  carrying  on  a  certain  kind  of 
business  or  for  doing  a  particular  act.  Many  states  required 
a  saloon  keeper  to  take  out  a  license.  The  Southern  states 
use  the  license  system  extensively;  and  many  businesses 
are  required  to  pay  a  license  tax.  Automobile  owners  are 
required  in  all  states  to  pay  a  license  tax  each  year.  A 
license  tax  is  often  levied  not  only  for  the  purpose  of  raising 
revenue  but  also  for  the  purpose  of  regulation.  Regulation 
is  usually  the  chief  motive  in  obliging  the  automobile  owner 
to  take  out  a  license. 

The  General  Property  Tax  and  Special  Assessments. 
The  general  property  tax  is  the  chief  source  of  revenue  of 
our  townships,  municipalities,  and  counties.  It  is  also  used 
by  many  of  our  states.  This  tax  may  be  divided  into  two 
parts :  a  tax  on  real  estate  and  a  tax  on  personal  property. 
The  real  estate  tax  is  levied  on  land  and  the  improvements 
thereon  according  to  their  value  as  determined  by  assessors. 


194  ELEMENTARY   ECONOMICS 

The  personal  property  tax  is  levied  upon  miscellaneous  forms 
of  property,  such  as  household  furniture,  live  stock,  tools 
and  implements,  stocks,  bonds,  mortgages,  and  the  like. 
The  personal  property  tax  is  not  and  probably  cannot  be 
fairly  assessed  and  collected.  Stocks,  bonds,  and  mortgages 
can  easily  be  concealed.  This  tax  is  condemned  by  many 
authorities  on  taxation.     It  should  be  discontinued. 

Certain  tax  reformers  also  advocate  reducing  the  tax  on 
improvements  below  that  assessed  on  land  of  equal  value. 
Such  a  step,  it  is  urged,  would  stimulate  building.  Under  the 
present  general  property  tax  laws,  after  ^  man  builds  a  new 
house  or  other  building  the  taxing  officials  immediately 
begin  to  penalize  him  for  improving  his  premises.  Certain 
Canadian  cities  exempt  improvements  from  taxation ;  and 
Pittsburgh  and  Scranton,  Pennsylvania,  tax  improvements 
at  a  lower  rate  than  land.  A  few  states  also  levy  an  income 
tax. 

A  special  assessment  is  used  by  cities  to  defray  the  cost 
of  some  public  improvement  such  as  a  pavement.  It  is 
levied  once  for  all ;  it  does  not  recur  year  after  year,  as 
does  a  tax.  The  special  assessment  is  levied  upon  the 
property  on  both  sides  of  the  street,  which  is  benefited  by 
the  laying  of  the  pavement. 

Justice  in  Taxation.  Many  theories  of  taxation  have  been 
advanced ;  but  the  most  commonly  accepted  are  the  benefit 
and  the  ability-to-pay  theories.  According  to  the  benefit 
theory,  justice  in  taxation  is  attained  when  taxes  are  ap- 
portioned according  to  benefits  received  from  governmental 
activities.  Special  assessments  are  levied  in  harmony  with 
the  benefit  theory.  That  taxes  should  be  paid  in  proportion 
to  the  ability  of  the  taxpayer  to  pay  is  the  theory  quite 
generally   accepted  by   the  American  people.    But   what 


TAXATION  195 

measures  the  ability  to  pay?  Is  it  measured  by  property, 
by  income,  or  by  some  other  criterion  ?  If  it  be  measured 
by  property  or  income,  does  the  abihty  increase  as  rapidly 
or  more  or  less  rapidly  than  the  increase  in  property  or 
income  ?  Should  the  rate  be  the  same  on  an  income  of  $1000 
per  year  as  on  one  of  $500,000  per  year?  Or,  should  the 
rate  be  progressive?  To  answer  that  the  rate  should  be 
progressive  seems  logical  and  fair;  but  complications  arise 
when  an  attempt  is  made  to  determine  what  the  exact  in- 
crease in  the  rate  should  be.  Our  income  and  inheritance 
taxes  are  almost  invariably  progressive;  but  the  general 
property  tax  is  not.  The  tariff  and  internal  revenue  duties 
are  as  a  rule  the  reverse  of  progressive;  these  taxes  fall  in 
proportion  to  income  more  heavily  upon  the  poor  than  the 
well-to-do.  Tariff  and  internal  revenue  duties  are  re- 
gressive; and  are  theoretically  unjust  forms  of  taxation. 
But  both  are  easily  and  cheaply  collected  and  the  taxpayer 
does  not  "  feel  "  the  tax  as  he  would  one  paid  in  a  lump  sum 
once  a  year  to  a  tax  collector. 

TOPICS   FOR   DISCUSSION 

1.  How  does  your  town  or  city  raise  its  revenues?     What  is 
the  city  tax  rate  ? 

2.  How  does  your  county  raise  its  revenues?     What  is  the 
county  tax  rate  ? 

3.  How  does  your  school  district  raise  its  revenues?     What  is 
the  school  tax  rate  ? 

4.  How  much  is  the  state  automobile  license  tax? 

5.  Do  you  favor  removing  the  general  property  tax  from  im- 
provements in  cities  ?    Why  ? 


CHAPTER  XXIII 
INDUSTRIAL  UNREST 

Contentment  has  been  pictured  as  a  mild  form  of  decay  or 
degeneracy.  Progress  and  advancement  are  likely  to  go 
out  of  the  door  when  one  becomes  entirely  contented  with 
his  lot  in  life.  A  desire  to  better  one's  condition  and  posi- 
tion is  commendable.  Nevertheless,  dissatisfaction  may  be 
carried  so  far  as  to  bring  about  undesirable  and  dangerous 
conditions  of  unrest.  It  is  well  when  the  working  people 
of  this  country  are  eager  to  improve  their  living  and  working 
conditions;  but  it  is  not  well  when  they  become  extremely 
dissatisfied  and  discontented.  When  industrial  unrest  be- 
comes extreme,  the  wise  economists  and  statesmen  will  waste 
little  energy  in  denouncing  the  wage  earners;  they  will 
diligently  seek  for  the  underlying  causes.  Not  until  these 
are  disclosed  can  the  difhculties  be  cleared  away.  Industrial 
unrest  manifests  itself  in  strikes,  lockouts,  boycotts,  agita- 
tion, sabotage,  and  inefficient  work.  In  1912,  industrial 
unrest  in  this  country  was  deemed  by  Congress  to  be  so  evi- 
dent that  a  Commission  on  Industrial  Relations  was  ap- 
pointed to  investigate  labor  conditions  and  make  a  report. 
This  Commission  was  composed  of  nine  persons,  —  three 
representing  the  employers;  three,  the  employees;  and 
three,  the  general  public.  The  Commission  made  a  careful 
study  of  the  situation.  It  held  hearings  before  which  dif- 
ferent types  of  persons  were  called  ;  and  it  employed  a  corps 
of  competent  investigators.  Its  final  Report  was  made  in 
1915. 

196 


INDUSTRIAL  UNREST  197 

Causes  of  Industrial  Unrest.  While  the  Commission,  as 
might  have  been  expected,  did  not  entirely  agree  as  to  the 
causes  of  unrest,  four  causes  were  emphasized :  the  unjust 
distribution  of  wealth  and  income;  unemployment  and  the 
denial  of  an  opportunity  to  earn  a  living ;  the  denial  of  justice 
in  the  creation,  the  adjudication  and  the  administration  of 
the  law ;  and  the  denial  of  the  right  to  form  effective  labor 
organizations.  These  four  causes  of  unrest  are  so  funda- 
mental that  a  brief  consideration  of  each  may  help  the  stu- 
dent to  understand  our  important  and  pressing  labor 
problems. 

Distribution  of  Wealth.  The  great  inequality  in  the  dis- 
tribution of  wealth  in  this  country  is  undoubtedly  one  of 
the  basic  causes  of  industrial  unrest.  The  wageworkers 
are  convinced  that  the  pecuniary  rewards  for  human  effort 
are  very  unfairly  apportioned.^  Too  many,  declare  the 
spokesmen  of  organized  labor,  work  hard,  regularly  and  in- 
telligently for  a  wage  which  will  scarcely  enable  them  to  sup- 
port a  family ;  others  do  not  work  and  yet  receive  fabulous 
incomes.  Such  a  situation,  in  a  democratic  country  favored 
with  free  public  schools  and  manhood  suffrage,  is  quite 
certain  to  result  in  vigorous  protests  and  in  the  initiation  of 
reform  or  revolutionary  movements. 

Unemployment.  Even  in  the  most  prosperous  times,  a 
considerable  percentage  of  men  and  women  who  desire  to 
work  and  who  are  able  to  do  so,  are  unable  to  obtain  work. 
In  hard  times,  in  a  time  of  crisis,  the  number  of  the  un- 
employed becomes  distressingly  large ;  bread  lines  and  soup 
kitchens  become  common  in  the  large  cities.  The  regular 
seasonal  fluctuations  in  demand  for  workers  is  not  small. 
Employers  hire  and  discharge  without  giving  much  con- 

1  See  Chapter  VII. 


198  ELEMENTARY   ECONOMICS 

sideration  to  the  plight  of  the  discharged  worker.  Only 
in  recent  years  are  employers  beginning  to  realize  that  a 
large  labor  *'  turn-over  "  is  expensive.  It  costs  perhaps 
$30  to  $100  to  break  in  a  new  man;  and  our  migratory 
labor  problem  is  in  part  a  consequence  of  the  thoughtless 
and  short-sighted  policies  of  employers  in  the  treatment 
of  their  labor  force. 

The  business  of  buying  and  selling  labor  power  has  been 
carried  out  in  a  fashion  which  is  antiquated  in  the  busi- 
ness of  buying  and  selling  almost  any  important  com- 
modity, —  shoes,  cloth,  or  grain,  for  example.  The  pack- 
peddler  method  of  tramping  from  shop  to  shop  looking  for 
a  job  is  still  used  in  many  places.  ''  Boy  wanted  "  signs 
are  often  seen;  but  no  one  would  think  of  putting  out  a 
"pair  of  shoes  wanted  "  sign.  Shoes  are  sold  in  well-estab- 
lished shoe  markets,  in  shoe  stores.  Public  employment 
bureaus  —  labor  stores  —  are  beginning  to  offer  fairly 
adequate  market  facilities  for  certain  forms  of  labor;  and 
large  employers  of  labor  are  developing  employment  de- 
partments which  deal  intelligently  with  the  problem  of  hir- 
ing men.  The  arbitrary  and  frequent  discharge  of  workers 
is  also  being  discredited. 

The  primitive  man  or  the  pioneer  farmer  did  not  face  the 
danger  of  unemployment.  The  pioneer  was  not  obliged 
to  seek  an  employer  in  order  to  get  permission  to  work  and 
to  earn  a  living  for  himself  and  family.  But  the  great  mass 
of  workers  to-day  cannot  get  access  to  an  opportunity  to 
earn  a  living  except  by  finding  an  employer.  Free  land  has 
disappeared ;  the  worker  must  work  for  wages  and  for  an 
employer.  Deny  him  this  opportunity  and  he  is  denied 
the  right  to  earn  a  living.  Involuntary  unemployment  under 
modern  conditions  is  a  potent  and  inevitable  cause  of  unrest. 


INDUSTRIAL  UNREST  199 

The  Denial  of  Justice.  The  testimony  taken  before  the 
Commission  clearly  indicated  that  the  workingmen  of  the 
nation  possess  a  deep-seated  conviction  that  they  are  not 
given  fair  treatment  in  regard  to  the  passage  of  laws  beneficial 
to  them  as  a  class  or  in  the  interpretation  and  administration 
of  such  laws  after  passage.  The  investigations  of  the  Com- 
mission also  disclosed  the  fact  that  the  laboring  men  were  not 
without  plausible  reasons  for  such  an  attitude.  The  history 
of  labor  legislation  points  clearly  to  the  conclusion  that  it  is 
less  difficult  to  obtain  the  passage  of  laws  protecting  property 
than  laws  protecting  human  life  and  preventing  overwork. 
The  long  history  of  child-labor  legislation  discloses  a  multi- 
tude of  obstacles  in  the  way  of  passing  adequate  child  labor 
laws ;  it  offers  eloquent  testimony  as  to  the  accuracy  of  this 
conclusion. 

In  the  second  place,  the  working  class  of  the  nation  is  also 
convinced  that  the  judges  of  our  courts  are  more  closely  in 
touch  and  in  sympathy  with  the  employers  and  the  capital- 
ists than  with  the  employees.  It  is  charged  that  after  labor 
laws  are  passed  the  courts  too  often  either  nullify  them  be- 
cause of  technicalities  which  would  not  be  raised  in  regard  to 
legislation  favorable  to  the  business  interests  of  the  nation, 
or  declare  them  unconstitutional  because  of  reactionary 
interpretations  of  the  federal  Constitution.  The  situation 
has  led  many  working  people  to  distrust  the  government  and 
especially  the  courts  of  the  nation.  It  is  one  of  the  most 
important  causes  of  industrial  unrest  in  the  United  States. 

Denial  of  the  Right  to  Join  Labor  Organizations.  Large 
corporations  are  great  combinations  of  capital.  A  labor 
organization  is  a  corresponding  combination  of  wageworkers. 
The  working  people  insist  that  united  or  collective  action 
on  their  part  is  necessary  in  order  to  secure  fair  wages  and 


200  ELEMENTARY  ECONOMICS 

fair  treatment  from  organized  capital.  But  many  large 
business  firms  have  firmly  and  persistently  used  their  in- 
fluence to  destroy  organizations  among  their  employees  or  to 
prevent  movements  having  for  their  motive  the  organization 
of  the  company's  employees.  Such  employers  refuse  to 
deal  with  their  employees  collectively,  that  is,  through 
union  representatives,  and  insist  that  bargains  be  made  only 
with  individual  workingmen.  The  workers  believe  that 
such  treatment  is  unfair  and  inimical  to  their  best  interests ; 
and  it  is  doubtless  true  that  organization  is  an  essential 
weapon  in  the  hands  of  workingmen  struggling  upward 
toward  better  working  and  living  conditions. 

There  are  many  other  causes  of  industrial  unrest  in  this 
country ;  but  the  four  which  have  been  briefly  considered 
are  certainly  among  the  most  important.  As  long  as  great 
inequalities  in  wealth  and  income  exist,  so  long  wiU  un- 
employment and  irregularity  of  employment  persist,  so 
long  will  the  workers  feel  that  they  are  unfairly  treated  in 
regard  to  the  passage,  administration,  and  adjudication  of 
laws,  so  long  will  hostile  employers  and  employers'  associa- 
tions continue  to  deny  their  employees  the  right  to  join 
labor  organizations,  and  so  long  will  the  nation  be  harassed 
by  strikes,  boycotts,  and  other  tokens  of  industrial  un- 
rest. The  most  dangerous  forms  of  industrial  unrest  may 
be  found  among  the  migratory  and  homeless  workers  of 
the  West.  These  men  live  an  abnormal  life;  and  they 
miss  the  incentives  furnished  by  the  home  and  by  other 
permanent  relationships  of  various  kinds  which  make  for 
good  citizenship  and  contentment. 

The  members  of  labor  organizations  are,  like  other  men, 
selfish;  and  they  are  as  a  rule  shortsighted  individuals. 
The  great  majority  of  these  workers  are  interested  in  im- 


INDUSTRIAL  UNREST  201 

mediate  benefits  rather  than  in  bigger  plans  of  social  better- 
ment which  cannot,  of  necessity,  be  realized  in  the  near 
future.  As  soon  as  wageworkers  get  an  increase  in  wages 
or  a  shorter  working  day,  plans  are  laid  for  further  increases 
in  wages  and  for  a  still  shorter  working  day.  "  The  beautiful 
doctrine  of  more  "  is  often  preached  by  labor  leaders. 


CHAPTER  XXIV 
SOCIAL  AND   INDUSTRIAL  BETTERMENT 

Plans  for  Betterment.  For  ages  men  and  women  have 
dreamed  of  human  betterment ;  many  have  been  the  builders 
of  Utopias.  In  recent  decades,  a  variety  of  schemes  for 
improving  living  and  working  conditions  and  for  eliminating 
poverty  and  distress,  ranging  from  the  conservative  to  the 
extremely  radical,  have  be^n  presented.  Of  these  only  the 
most  prominent  will  be  herein  outlined.  The  organized 
wageworkers  hope  to  improve  conditions  for  the  workers 
through  union  action  in  the  industrial  and  political  field. 
In  recent  years,  certain  wide-awake  employers  have  reached 
the  conclusion  that  the  efficiency  of  their  business  activities 
depends  in  a  large  degree  upon  the  living  and  working  con- 
ditions surrounding  their  employees.  Consequently,  em- 
ployers are  improving  the  sanitary  conditions,  lighting,  and 
ventilation  in  their  stores  and  factories  and  providing  ex- 
cellent toilet  facilities  and  opportunities  for  rest  and  recre- 
tion.  This  is  commonly  called  welfare  work.  The  re- 
mainder of  this  chapter  will  be  devoted  to  a  brief  consider- 
ation of  certain  other  programs  of  social  and  industrial 
betterment. 

The  Single  Tax.  The  single-tax  advocates  propose  to 
eliminate  poverty  by  the  adoption  of  one  measure.  The 
orthodox  single-taxer  demands  that  the  government  take 
as  revenue  all  of  the  rent  of  land,  and  that  no  other  form 
of  tax  be  levied.  Under  the  single  tax  none  of  the  forms  of 
taxation  discussed  in  the  chapter  on  taxation  would  be 

202 


SOCIAL  AND   INDUSTRIAL   BETTERMENT       203 

Utilized  except  that  part  of  the  general  property  tax  which  is 
levied  on  land,  not  on  improvements  or  personal  property. 
The  income  of  all  forms  of  government,  federal,  state,  and 
local,  would  be  an  amount  equal  to  the  rent  of  land.  The 
selling  value  of  land,  not  including  improvements,  would  fall 
to  zero ;  the  improvements  would  have  value  and  be  bought 
and  sold  much  the  same  as  at  the  present  time.  But  land- 
owners could  no  longer  afford  to  hold  desirable  land  out  of 
use  for  the  purposes  of  land  speculation.  According  to  the 
theory  of  the  single  tax,  monopoly  profits  and  all  great  in- 
equalities in  wealth  and  income  arise  out  of  the  private 
receipt  of  land  rents.  If  all  men  were  placed  on  an  equality 
in  regard  to  access  to  land,  if  every  one  who  uses  land  were 
obliged  to  pay  the  entire  rental  return  from  that  land  as  a 
tax,  then,  according  to  the  advocates  of  this  reform  measure, 
each  person  would  be  treated  fairly  and  great  inequalities 
in  opportunity  would  vanish.  The  single-taxer  desires  to 
continue  competition,  not  to  destroy  it.  Henry  George  was 
the  great  American  advocate  of  the  single  tax. 

An  increasing  number  of  persons,  including  hard-headed 
business  men,  are  willing  to  go  some  distance  in  the  direction 
of  the  single-tax  goal.  This  group  is  in  favor  of  the  re- 
duction of  taxation  on  improvements  and  personal  property, 
and  of  a  corresponding  increase  in  the  tax  on  land.  Land 
rent  is  a  kind  of  overhead  charge  which  all  businesses  are 
obliged  to  pay  to  landowners.  An  increase  in  the  tax  on 
land  would  not  increase  land  rent.  If  it  led  to  a  reduction 
in  the  tax  on  capital  and  industry,  such  reduction  would  be 
a  gain  for  the  enterpriser  and  would  correspondingly  lower 
the  expenses  of  carrying  on  a  business. 

Socialism.  The  socialists  maintain  that  the  private 
receipt  of  rent,  interest,  and  profits  constitutes  an  injustice 


204  ELEMENTARY   ECONOMICS 

to  the  great  mass  of  unprivileged  workers.  The  present 
industrial  order,  called  by  socialists  the  capitalist  system, 
enables  a  comparatively  few  individuals  to  exploit  the 
many.  Under  socialism,  all  large-scale  industries  and  all 
monopolies  are  to  be  owned  and  operated  by  the  govern- 
ment. Socialists  point  out  that  competition  is  wasteful, 
and  that  governmental  operation  would  eliminate  com- 
petition. These  enthusiasts  for  radical  social  reform  de- 
clare that  competition  leads  to  combination  and  large-scale 
industry,  and  that  when  an  industry  becomes  large-scale  it 
is  ripe  for  social  control  and  operation.  According  to  the 
socialists,  society  will  presently  outgrow  private  capitalism 
as  it  has  slavery  and  serfdom.  Nevertheless,  under  social- 
ism it  is  assumed  that  private  ownership  of  many  forms  of 
wealth  and  of  small  businesses  would  be  continued.  The 
socialists  hold  high  a  fine  ideal  of  economic  justice  and  of 
equality  of  opportunity ;  and  they  insist  upon  a  democratic 
form  of  government. 

National  Guilds.  The  national  guild  movement  has 
gained  considerable  prominence  in  England.  The  national 
guildsmen  favor  governmental  ownership  of  industry,  but 
wish  to  place  the  control  of  a  particular  industry  in  the  hands 
of  the  workers  —  unskilled,  skilled,  and  administrative  — 
in  that  industry.  The  workers  would  practically  become 
partners  in  a  business  controlled  by  the  government.  It 
differs  from  socialism  in  that  the  management  of  industry 
would  be  decentralized.  The  workers,  not  their  official 
governmental  representatives,  would  direct  the  management 
of  an  industry.  Under  the  national  guild  system,  our  post- 
office  would  be  managed  by  the  post-office  employees.  The 
relations  between  different  industries  would  be  determined 
by  some  representative  body  like  our  Congress.     In  Eng- 


SOCIAL  AND   INDUSTRIAL  BETTERMENT       205 

land  under  war  conditions,  the  government  took  control 
of  certain  industries  and  virtually  made  employers  agents 
operating  the  business  for  definite  returns.  Producing  for 
profits  was  actually  supplanted  by  producing  for  use.  This 
is  not  a  national  guild  system,  but  it  bears  some  of  the 
marks  of  that  plan. 

Anarchism  and  Syndicalism.  The  anarchist  wishes  to 
put  an  end  to  all  coercive  governmental  power;  he  would 
eliminate  organized  government.  The  syndicalist  likewise 
repudiates  the  political  state.  He  would  place  the  control 
of  industry  in  the  hands  of  the  workers  in  each  industry; 
but,  unlike  the  national  guildsmen,  would  make  no  provision 
for  national  control  over  the  various  industries  and  for  their 
proper  coordination.  The  Industrial  Workers  of  the  World 
in  the  United  States  represent  one  form  of  syndicalism. 
The  syndicalist  would  overthrow  the  present  industrial  order 
by  strikes,  sabotage,  or,  if  necessary,  by  more  violent  means. 
The  syndicalists  are  not  in  favor  of  making  agreements 
with  employers,  and  they  are  opposed  to  such  labor  organiza- 
tions as  those  included  in  the  American  Federation  of 
Labor. 

The  Program  of  the  Sociologists.  The  social  workers  and 
the  sociologists  are  convinced  that  no  one  single-track  plan 
will  bring  about  a  Utopia  among  men,  and  that  no  great  and 
sweeping  changes  in  human  institutions  come  suddenly 
and  without  preparation.  Social  and  industrial  betterment 
are  believed  to  be  the  results  of  evolution  rather  than  of 
revolution.  They  are  of  the  opinion  that  as  there  is  law  and 
order  in  the  realm  of  physics  and  chemistry,  so  cause  and 
effect  may  be  studied  in  the  political  and  social  life  of  human 
beings.  Sociology  attempts  to  develop  the  science  and  art 
of  human  betterment ;  it  is  concerned  with  human  relation- 


206  ELEMENTARY   ECONOMICS 

ships.  A  systematic  program  for  industrial  and  social  better- 
ment would  include  plans  (a)  to  eliminate  great  inequalities 
of  wealth  and  to  usher  in  an  approximation  to  equality  of 
opportunity ;  (6)  to  reduce  the  waste  of  human  life  through 
sickness,  premature  death,  and  accident ;  (c)  to  increase  the 
national  and  world  output  of  desirable  commodities  and 
services ;  (d)  to  improve  educational  facilities ;  (e)  to  pro- 
vide for  wholesome  recreation  and  increased  leisure.  These 
plans,  it  will  be  noted,  are  somewhat  interrelated  and  inter- 
dependent. 

The  sociologist  insists  that  the  startling  contrast  between 
the  prodigious  income  of  certain  privileged  classes,  received 
because  of  monopoly  or  speculative  gains,  and  the  hopeless 
and  grinding  poverty  of  the  masses,  must  become  a  matter 
of  history  before  definite  and  certain  progress  toward  a  high 
level  of  human  achievement  and  happiness  may  be  an- 
ticipated. Approximate  equality  of  opportunity,  it  is  con- 
fidently believed,  is  essential  to  progress  in  a  democratic 
nation.  With  these  ends  in  view,  it  is  proposed  (1)  to  reduce 
the  size  of  incomes  received  from  speculation  and  monopoly 
power.  This  may  be  accomplished  by  stringent  regulation 
of  trusts  and  monopolies.  (2)  The  second  part  of  the  pro- 
gram is  to  use  the  taxing  power  to  take  considerable  portions 
of  large  incomes  for  governmental  purposes.  The  plan 
provides  for  highly  progressive  income  and  inheritance  taxes, 
and  for  the  taxation  of  excess  profits ;  for  an  increase  in  the 
taxation  of  land  rents  and  of  monopoly  and  speculative 
gains.  Or,  in  essence,  it  is  proposed  to  tax  lightly  incomes 
which  are  "  earned,"  and  to  tax  heavily  incomes  which  may 
be  called  "  unearned  "  or  "  findings."  Of  course,  much 
difficulty  may  be  confronted  in  reaching  a  generally  satis- 
factory definition  of  "  earned." 


SOCIAL  AND    INDUSTRIAL   BETTERMENT       207 

The  waste  of  human  life  from  illness  and  accidents  is  ap- 
palling. An  almost  incredible  number  of  lives  are  snuffed 
out  before  the  first  birthday;  and  a  large  percentage  die 
before  maturity.  Many  who  survive  and  reach  maturity 
are  stunted  in  body  and  mind,  untrained,  inefficient,  ineffec- 
tive, diseased,  dissipated,  and  vice-ridden.  Furthermore,  the 
number  of  defectives  is  increasing.  Society  is  wasting  far 
too  much  of  its  human  as  well  as  of  its  natural  resources. 
Unless  the  death  rate  is  lowered  and  the  amount  of  sickness 
reduced,  social  betterment  cannot  be  looked  for  with  any 
degree  of  expectancy.  The  nation  may  instead  face  the  un- 
welcome specter  of  social  degeneracy.  Poor  health  among 
the  great  mass  of  people  increases  inefficiency,  crime,  and 
poverty.  Poor  health  in  turn  is  due  in  no  small  measure 
to  bad,  insufficient,  and  improperly  selected  food,  to  in- 
sanitary housing  conditions,  to  lack  of  proper  recreation, 
and  to  bad  habits.  Poverty  often  leads  to  sickness;  and 
sickness  is  on  the  other  hand  a  potent  cause  of  poverty. 
The  death  rate  is  much  higher  in  the  tenement  districts  of  a 
city  than  in  the  better  residence  sections.  A  positive  health 
program  would  include  improvement  in  housing  conditions ; 
pure  water,  milk,  and  food  supplies ;  clean  streets  and  alleys ; 
better  factory  conditions;  improvement  in  curative  and 
especially  in  preventive  medical  science;  health  insurance; 
and  education  in  regard  to  food  values  and  proper  diet. 

Social  betterment  is  conditioned  not  merely  on  greater 
equality  in  the  distribution  of  the  products  of  industry  but 
also  on  greatly  increasing  the  output  of  desirable  products. 
Better  health  will  improve  the  efficiency  of  individuals. 
Scientific  management  and  psychological  research  have 
proved  that  the  great  majority  of  individuals  are  far  from 
attaining  their  maximum  of  efiiciency  in  either  manual  or 


208  ELEMENTARY   ECONOMICS 

mental  work.  The  average  student  does  not  know  how  to 
study  or  how  to  use  effectively  his  brain  power;  and  the 
average  manual  worker  is  inefficient  as  an  individual  laborer 
and  too  often  he  is  not  properly  coordinated  with  others  to  do 
good  teamwork.  A  positive  program  to  increase  the  ef- 
ficiency of  the  man-power  of  the  nation  would  include  re- 
duction of  sickness  and  accidents,  the  application  of  scientific 
methods  in  regard  to  the  training  and  work  of  individuals 
and  of  groups  of  individuals,  better  educational  facilities, 
the  elimination  of  gainful  child  labor,  and  the  reduction  of 
idleness  and  unemployment.  All  normal  adults  should  be 
efficient  workers.  The  program  would  also  include  the 
economical  utilization  and  conservation  of  the  natural  re- 
sources of  the  nation  and  of  the  world. 

The  complexity  and  interdependence  of  modern  life,  to 
which  attention  has  been  directed,  makes  necessary  universal 
and  compulsory  training  of  the  youth.  Education  inside 
and  outside  the  school  system  should  place  before  the  in- 
coming generation  the  experience  and  ideals  of  preceding 
generations;  its  purpose  is  to  make  the  new  generation 
"  the  heir  of  the  ages."  Education  should  aid  in  developing 
strong  and  healthy  bodies  and  alert  mental  powers;  it 
should  be  a  potent  factor  in  directing  and  controlling  the 
desires  and  passions  of  the  youth ;  it  should  help  to  create 
an  interest  in  art,  literature,  and  social  welfare ;  and  it  should 
give  specific  instruction  in  a  trade  or  profession  which  will 
enable  the  student  to  become  a  skillful,  useful,  and  self- 
reliant  worker. 

Work  is  not  an  end  in  itself;  it  is  a  means  to  an  end. 
Social  betterment  will  result  in  more  of  leisure,  recreation, 
and  enjoyment  for  the  masses.  The  use  of  machinery 
and  natural  power  and   the   adoption  of  a  positive   pro- 


SOCIAL  AND   INDUSTRIAL  BETTERMENT       209 

gram  for  increasing  the  efficiency  of  all  workers,  will 
offer  a  larger  and  larger  opportunity  for  leisure.  Shorter 
working  days,  Saturday  half-holidays,  and  a  summer  va- 
cation are  some  of  the  fruits  which  seem  at  the  present  time 
feasible,  —  although  the  war  has  tended  to  delay  progress 
in  this  direction.  In  turn,  a  minimum  of  leisure  and  recrea- 
tion are  essential  to  efficiency.  Furthermore,  play,  games, 
and  amusements  of  the  proper  kind  and  well  supervised,  are 
tremendous  forces  in  building  up  good  character  and  physical 
stamina. 

The  World  War  is  teaching  conclusively  the  value  of  inter- 
nationalism and  of  a  world  alliance.  Any  worth-while  pro- 
gram for  social  betterment  will  be  not  merely  local,  national, 
or  class  in  its  scope ;  it  will  be  a  world  and  humanity  pro- 
gram. It  will  transcend  the  limits  of  nations,  of  classes,  and 
of  races ;  it  will  look  to  the  brotherhood  of  man. 


INDEX 


Acceptances,  95. 
Adamson  Act,  116. 
Americanization,  79,  127,  130. 
Anthracite  coal  monopoly,  86. 
Australia,  public  business  in,  124. 

Birth  rates,  78. 

Bondholders,  104,  106. 

Bonds,       gilt-edged,       60 ;     Liberty 

Loans,  60. 
Budget,    English,    187;     New   York 

City,  188. 
Business  principles,  50. 

Canal,  Erie,  18. 

Capital  goods,  38,  46,  47. 

Chance  gains,  67. 

Chase,  Harvey  S.,  183. 

Checks,  94,  97. 

Child  labor,  148. 

China,  77. 

Chinese     laborers,     excluded     from 

U.  S.,  130. 
Commerce    Commission,    Interstate, 

113,  115,  116,  117,  118. 
Constitution   of   the   United   States, 

143,  180,  199. 

Death  rates,  207. 
Democracy,  77,  78. 
Depreciation,  66,  105. 
Discrimination,  railway,  112, 113, 115. 

Education,  aim  of,  208. 
Efficiency  of  individuals,  207-209. 
Elight-hour  day,  advantages  of,  145. 
Employment  bureaus,  public,  198. 

Famine,  world,  24. 

Farm    family,    160;     laborers,    127, 

161 ;  property,  158,  161. 
Food  supply,  8,  77,  174;    survey  of 

Altoona,  175. 


Gold,  92. 

Gompers,  Samuel,  136. 

Income,  30,  43,  44,  65,  70,  77,  105, 

181. 
Industrial  Relations,  Commission  on, 

196,  197,  199. 

Japanese  laborers,  excluded  from 
United  States,  130. 

King,  Professor,  181. 

Labor,  definition  of,  53 ;  division  of, 
19,  22,  28,  29,  76,  131 ;  Legislation, 
American  Association  for,  169 ; 
power,  sale  of,  53,  54,  55,  56,  142, 
143 ;  turnover,  198. 

Land,  38,  60,  62,  65,  203  ;  grants,  117. 

Legislation,  sumptuary,  51. 

Leisure,  134,  145,  208,  209. 

Man,  primitive,  1,  2,  8,  10,  14,  198. 
Manufacturers,  National  Association 

of,  140. 
Markets,  public,  178. 
Middlemen,  statistics  of,  176,  177. 
Migratory    workers,    abnormal    life 

of,  200. 
Mine  Workers,  United,  136,  137. 
Minimum  wage  laws,  148. 
Monopoly,  82-85,  111,  119,  120,  180, 

206 ;  gains,  67,  124,  203. 

Negroes,  migration  to  north,  129. 

Opportunity,  equality  of,  206. 

Pioneer,  characteristics  of,  7,  12,  16, 

21,  30,  126,  158,  198. 
Pooling,  115. 
Poverty,  71,  72,  129,  207. 
Primitive  man,  see  Man. 


211 


212 


INDEX 


Promoters,  106. 
Property,  private,  10,  11. 
Purchasing  power,  45,  51,  94. 

Railways  and  markets,  32,  109 ; 
governmental  operation  of  Ameri- 
can, 117;  growth  of ,  18,  110. 

Recreation,  economic  importance  of, 
209. 

Rediscounting,  99,  100. 

Regulation  of  industry,  40. 

Revolution,  industrial,  12. 

Rural  exodus,  162. 

Salesmanship,  46,  179. 

Shoe  Machinery  Company,  United, 

87. 
SUver,  92. 

Slavery,  9,  11,  13,  79,  204. 
Sociologists,    program    of    the,   205- 

206. 
Soil,  fertility  of  the,  62. 
Speculators,  40. 

Standard  Oil  Companies,  86,  107. 
Standardization,  33. 
Stock,  common,  105 ;   preferred,  105. 
Stockholders,  103,  104,  106 
Sweating,  150. 


Tax  Commission  of  Minnesota,  184 ; 
income,  52,  71,  189,  191,  195,  206; 
inheritance,  52,  192,  195. 

Trade  agreement  system,  56  ;  Com- 
mission, Federal,  107. 

Transportation,  chief  means  of,  31. 

Union,  industrial,  137 ;    trade,  136. 
United  States  Steel  Corporation,  107. 

Variety  of  goods,  37. 

Wage,  fair,  58,  108,  199;  workers, 
number  of,  126. 

Wants,  human,  27,  28,  35,  36,  39, 
40,  49,  91,  101. 

War,  the  Great,  24,  32,  49,  71,  109, 
209. 

Wasteful  competition,  84,  121,  204; 
consumption,  51. 

Waste  of  human  life,  207. 

Wealth  of  the  American  nation,  69. 

Welfare  work,  155,  202. 

Work,  doctrine  of  make,  49 ;  waste- 
ful, 45,  47,  48,  50. 

Workers  of  the  World,  Industrial, 
132,  136,  139,  205. 

World  aUiance,  209. 


Printed  in  the  United  States  of  America. 


UNIVERSITY  QF  CALIFORNIA  LIBRARY 
'  *  This  book,  is  DUE-ob  iit^  jy»st  date  stamped  below. 
Fine  sch^ule*  25. 


REC'D  LD 

FEB    11961 

26lAar6U0 

Nl/\R141961 


RECD  tD 
APR    51962 


LD  21-100m-12,'46(A2012sl6)4120 


YB  60768 


i 


416608 


UNIVERSITY  OF  CAUFORNIA  UBRARY 


